As filed with the Securities and Exchange Commission on May 6, 1998
Registration Statement No. 333-____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
__________
XCL LTD.
(Exact name of registrant as specified in its charter)
Delaware 1311 51-0305643
(State or other jurisdiction of (Primary StandardIndustrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508
(318) 237-0325
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________________
Benjamin B. Blanchet
XCL Ltd.
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508
(318) 237-0325
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________________
Copy to:
Peter A. Basilevsky, Esq.
Satterlee Stephens Burke & Burke LLP
230 Park Avenue
New York, New York 10169
(212) 818-9200
____________________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
registration statement.
------------------------------
If the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box. [X]
If the securities being registered on this form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, check the
following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================
Title of Each Class of Amount To Be Offering Price Aggregate Amount of
Securities To Be Registered Registered Per Share Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amended Series A, Cumulative
Convertible Preferred Stock,
$1.00 par value per share 1,163,115 $85.00 (1)(2) $98,864,775.00 $29,165.11
- ----------------------------------------------------------------------------------------------
Common Stock, $.01 par value
per share 1,999,286 $4.125 (3) $8,247,054.75 $2,432.88
- ----------------------------------------------------------------------------------------------
Common Stock, $.01 par value
per share 170,383 $4.125 (3) $702,829.88 $207.33
==============================================================================================
Common Stock, $.01 par value issuable upon conversion or exercise
of:
Amended Series A Preferred Stock 13,181,970 $7.50 (1)(4) $98,864,775.00 $29,165.11
(continued on next page)
Amended Series B Preferred Stock 991,262 $4.75 (1)(4) $4,708,494.50 $1,389.01
- ----------------------------------------------------------------------------------------------
$3.0945 Warrants expiring
November 1, 2000 133,915 $3.0945 (1)(5) $414,399.97 $122.25
- ----------------------------------------------------------------------------------------------
$3.0945 Warrants expiring
May 20, 2004 14,092,283 $3.0945 (1)(5) $43,608,569.74 $12,864.53
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
December 31, 2001 205,000 $3.5264 (1)(5) $722,912.00 $213.26
- ----------------------------------------------------------------------------------------------
$7.50 Warrants expiring
December 21, 2000 216,000 $7.0528 (1)(5) $1,523,404.80 $449.40
- ----------------------------------------------------------------------------------------------
$5.25 Warrants expiring
December 21, 2000 128,000 $5.1947 (1)(5) $664,921.60 $196.15
- ----------------------------------------------------------------------------------------------
$5.25 Warrants expiring
April 22, 2001 64,000 $5.1947 (1)(5) $332,460.80 $98.08
- ----------------------------------------------------------------------------------------------
$7.50 Warrants expiring
December 28, 2000 60,000 $7.50 (1)(5) $450,000.00 $132.75
- ----------------------------------------------------------------------------------------------
$7.50 Warrants expiring
January 2, 2001 28,888 $7.50 (1)(5) $216,660.00 $63.91
- ----------------------------------------------------------------------------------------------
$7.50 Warrants expiring 5 years
after first exercise 50,000 $7.50 (1)(5) $375,000.00 $110.63
- ----------------------------------------------------------------------------------------------
$4.65 Warrants expiring
December 21, 2000 46,400 $4.601 (1)(5) $213,486.40 $62.98
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
March 7, 2001 13,600 $3.7105 (1)(5) $50,462.80 $14.89
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
April 22, 2001 12,000 $3.7105 (1)(5) $44,526.00 $13.14
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
July 30, 2001 100,000 $3.5264 (1)(5) $352,640.00 $104.03
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
August 13, 2001 63,467 $3.7105 (1)(5) $235,494.30 $69.47
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
December 31, 1998 20,000 $3.5264 (1)(5) $70,528.00 $20.81
- ----------------------------------------------------------------------------------------------
$1.875 Warrants expiring
December 31, 1999 48,891 $1.875 (1)(5) $91,670.63 $27.04
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
December 31, 1999 124,964 $3.7105 (1)(5) $463,678.92 $136.79
- ----------------------------------------------------------------------------------------------
$0.15 Warrants expiring
April 9, 2002 683,723 $.15 (1)(5) $102,558.45 $30.25
- ----------------------------------------------------------------------------------------------
$2.8125 Warrants expiring
August 13, 2001 100,000 $2.7928 (1)(5) $279,280.00 $82.39
- ----------------------------------------------------------------------------------------------
$3.75 Warrants expiring
February 20, 2002 13,333 $3.7105 (1)(5) $49,472.10 $14.59
- ----------------------------------------------------------------------------------------------
$0.15 Warrants expiring
December 31, 2001 153,333 $0.15 (1)(5) $22,999.95 $6.78
- ----------------------------------------------------------------------------------------------
$5.50 Warrants expiring
March 2, 2002 250,000 $5.50 (1)(5) $1,375,000.00 $405.63
==============================================================================================
TOTAL 32,950,698 $263,048,055.58 $77,599.18
==============================================================================================
</TABLE>
(1) Pursuant to Rule 416 there are also being registered
such additional shares of Common Stock as may become issuable
pursuant to applicable anti-dilution provisions.
(2) Estimated solely for the purposes of calculating the
registration fee using the proposed offering price of the
Amended Series A Preferred Stock, as required by Rule 457 (i).
(3) Estimated solely for the purpose of calculating the
registration fee using the average of the high and low prices
reported on the American Stock Exchange ("AMEX") onApril 23,
1998, as required by Rule 457(c).
(4) Estimated solely for the purpose of calculating the
registration fee using the conversion price of the Preferred
Stock, as required by Rule 457(g)(1), as adjusted for the
reverse stock split.
(5) Estimated solely for the purpose of calculating the
registration fee using the exercise price of the Warrants, as
required by Rule 457(g)(1), as adjusted for the reverse stock
split and applicable anti-dilution adjustments.
SUBJECT TO COMPLETION, DATED MAY 6, 1998
PROSPECTUS
XCL LTD.
1,163,115 SHARES OF 9.50%
AMENDED SERIES A, CUMULATIVE CONVERTIBLE PREFERRED STOCK
32,950,698 SHARES OF COMMON STOCK
This Prospectus offers for resale in transactions registered
under the Securities Act of 1933, as amended (the "Securities Act")
1,163,115 issued and outstanding shares of 9.50% Amended Series A,
Cumulative Convertible Preferred Stock (the "Amended Series A
Preferred Stock") of XCL Ltd. (the "Company"). These shares of
Amended Series A Preferred Stock were originally issued in the
following transactions intended to qualify for an exemption from
registration under the Securities Act:
o 294,118 shares were issued in an Equity Offering in which
the Company offered privately 294,118 units, each unit
consisting of one share of Amended Series A Preferred
Stock and one warrant to buy 21.8 shares of Common Stock
(the "Equity Warrants").
o 11,816 shares were issued to pay some of the interest
due on certain debt of the Company.
o 726,907 shares were issued in a recapitalization of the
Company's Series A, Cumulative Convertible Preferred Stock
("Series A Preferred Stock") into Amended Series A
Preferred Stock and in payment of accrued and unpaid
dividends on that stock.
o 63,706 shares were issued in a recapitalization of the
Company's Series E, Cumulative Convertible Preferred Stock
("Series E Preferred Stock") into Amended Series A
Preferred Stock and in payment of accrued and unpaid
dividends on that stock.
o 12,918 shares were issued to pay November 1, 1997 dividend
on Amended Series A Preferred Stock.
o 53,650 shares issuable to pay May 1, 1998 dividend on
Amended Series A Preferred Stock.
This Prospectus also offers for resale in transactions
registered under the Securities Act 32,950,698 shares of Common
Stock of the Company which have been or will be issued in
transactions intended to qualify for an exemption from
registration under the Securites Act. These shares include:
o 1,999,286 shares that were issued in private placement
transactions and are currently outstanding.
o 170,383 shares that the Company is contractually obligated
to issue.
o 13,181,970 shares that may be issued if holders of Amended
Series A Preferred Stock convert that stock into Common
Stock.
o 991,262 shares issuable upon conversion of Amended Series
B, Cumulative Convertible Preferred Stock ("Amended Series
B Preferred Stock").
o 6,411,772 shares that may be issued if the holders of
the Equity Warrants exercise those warrants.
o 6,400,000 shares that may be issued upon the exercise of
warrants (the "Note Warrants") that were issued in a Note
Offering in which the Company privately offered 75,000
units, each unit consisting of one 13.50% Senior Secured
Note due May 1, 2004, in the principal amount of $1,000
(collectively, the "Notes") and one Note Warrant to
purchase 1,280 shares of Common Stock.
o 1,280,511 shares that may be issued upon exercise of
warrants issued to Jefferies & Co., Inc. ("Jefferies") as
an investment banking fee in connection with the Equity
and Note Offerings.
o 2,515,514 shares that may be issued if various other
outstanding warrants are exercised.
In this Prospectus, the Equity Warrants, the Note Warrants, the
warrants issued to Jefferies and the other outstanding warrants are
all referred to as "Warrants." The shares of Common Stock that will
be issued when the Warrants are exercised are referred to as the
"Warrant Shares." The shares of Common Stock that will be issued
when the Amended Series A Preferred Stock and the Amended Series B
Preferred Stock are converted into Common Stock are referred to as
the "Conversion Stock." The shares of Common Stock that the Company
is contractually required to issue are referred to as the "Contract
Stock." The Amended Series A Preferred Stock, Warrant Shares,
Conversion Stock and Contract Stock are collectively referrred to as
the "Securities."
This Prospectus is intended for use by the holders (the
"Selling Security Holders") of the Securities in resale transactions
registered under the Securities Act. The Company will not receive
any proceeds from the sale of the Securities (other than proceeds
upon exercise of the Warrants). See "Selling Security Holders" and
"Use of Proceeds." The Company will pay the costs of registering
sales of the Securities covered by this Prospectus under the
Securities Act and related costs (although the Selling Security
Holders will pay all applicable stock transfer taxes, brokerage
commissions or other transaction charges or expenses). The Company
estimates that its expenses in making this offering will be $[o].
The Common Stock is quoted on the American Stock Exchange (the
"AMEX") under the symbol "XCL" and on the London Stock Exchange. On
April 30, 1998, the last reported closing price of the Common Stock
on the AMEX was $4.00. It is anticipated that the Amended Series A
Preferred Stock will be listed on the AMEX and will trade separately
immediately after the date of this Prospectus under the symbol
"[o]".
See "Risk Factors" beginning on page [o] of this Prospectus for
a discussion of certain factors that should be considered in
evaluating an investment in the Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1998.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and files reports, proxy and information statements and
other information with the U.S. Securities and Exchange
Commission (the "Commission"). Such reports, proxy and
information statements and other information can be inspected and
copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of
the Commission: Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained by mail from the Public Reference
Section of the Commission, at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition,
the Commission maintains a site on the Word Wide Web that
contains reports, proxy and information statements and other
information filed electronically by the Company. These can be
accessed over the Internet at http://www.sec.gov. The Company's
Common Stock is listed on the AMEX. Reports, proxy and
information statements and other information relating to the
Company can be inspected at the offices of the AMEX at 86 Trinity
Place, New York, NY 10006-1881.
This Prospectus constitutes part of a registration statement
on Form S-1 (together with all amendments and exhibits referred
to in this Prospectus as the "Registration Statement") filed by
the Company with the Commission under the Securities Act. This
Prospectus omits some of the information contained in the
Registration Statement. Consult the Registration Statement and
its exhibits for further information about the Company and the
Securities covered hereby. Statements made herein about the
provisions of contracts or other documents are not necessarily
complete; each such statement is qualified in its entirety by
reference to the copy of the applicable contract or other
document filed with the Commission. Copies of the Registration
Statement and its exhibits are on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed
by the Commission, or may be examined without charge at the
public reference facilities of the Commission described above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes (or incorporates by reference)
"forward-looking statements." All statements made in this
Prospectus, other than historical facts (whether set forth or
incorporated by reference), are forward-looking statements.
Although the Company believes such statements are reasonable, it
can give no assurance that they will prove to be correct.
It is difficult to estimate quantities of proved oil and
natural gas reserves and to project future rates of production
and timing of development costs. Those estimates depend upon
many factors the Company cannot control. Reserve engineering
involves estimating underground accumulations of oil and natural
gas that cannot be measured in an exact way. The accuracy of any
reserve estimate depends on the quality of available data, the
interpretation of that data and the judgment of the reserve
engineers. As a result, estimates made by different engineers
are often different. Because reserve estimates are only
estimates, the actual amounts of oil and natural gas recovered
are usually different from the estimates. Results of drilling,
testing and production subsequent to the date of an estimate may
require reserve estimates to be revised and may change the
schedule of production and development drilling.
Additional important factors that could cause actual results
to differ materially from the Company's expectations are
disclosed under "Risk Factors" and elsewhere in this Prospectus.
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the
information that may be important to you. You should carefully
read the whole Prospectus and its appendices, as well as the
information incorporated by reference into this Prospectus.
Usually in this Prospectus, the terms "XCL" or the "Company"
refer to XCL Ltd. and all of its subsidiaries. Except as
otherwise noted, the reported reserve data are based on reserve
estimates made by the Company's independent petroleum engineers.
See "Glossary of Terms" for definitions of certain oil and gas
terminology.
The Company
-----------
XCL is principally engaged in the exploration for and
development of oil and gas in the Zhao Dong Block (the "Block")
located in the shallow waters of the Bohai Bay in the People's
Republic of China ("China"). The Block is located in one of
China's major oil-producing basins. The Company believes that a
portion of the Block is an extension of the onshore Dagang oil
field complex to the west, estimated by Chinese authorities to
have an ultimate recovery of more than one billion barrels (with
approximately 700 million barrels produced already). The Block
is about 40 miles northwest of the Shengli oil field, the largest
in the basin, which Chinese authorities estimate has an ultimate
recovery of more than seven billion barrels (with about 4 billion
barrels produced already).
In early 1993, XCL became the first foreign company to enter
into an onshore Production Sharing Agreement (the "Contract"),
with the China National Oil and Gas Exploration and Development
Corporation ("CNODC"), providing for exploration, development,
and production of the Block. The Contract provides that the
"Foreign Contractor" (the Company and Apache Corporation as a
group, working through a participation agreement) is to pay all
exploration costs. The Contract also states that, when a
commercial discovery is made, CNODC may choose to participate in
development, with 51% of all development and operating costs and
allocable remainder oil and gas production allocated to CNODC and
49% to the Foreign Contractor. The Foreign Contractor's share is
divided equally between XCL and Apache. See "Business -- The
Contract" and "Business -- Apache Farmout."
XCL and Apache have successfully tested six of nine wells
drilled to date on the Block, with total test rates exceeding
39,500 barrels of oil per day (or an average per well rate of
6,647 barrels of oil per day). Of the three wells not tested, one
(the D-3) was proven productive by wire line samples and tests in
several sands but was not drill-stem tested, while a second (the
F-1) was drilled but not fully evaluated. Drilling activities on
the F-1 have been abandoned. Development of the C-D Field for
production is now proceeding.
Projections made by H.J. Gruy and Associates ("Gruy"), the
Company's independent petroleum engineers, in January of 1998
anticipate gross proved undeveloped reserves in the C-D Field
drilled to date of 46.26 million barrels of recoverable oil.
Consequently, the Company's net interest in such proved
undeveloped reserves is estimated to be approximately 11.76
million barrels of oil with a PV-10 of $62.5 million as of
January 1, 1998. The Company believes that the C-D Field and the
remainder of the Block hold the potential for additional
significant increases in oil reserves. See "Business -- Oil and
Gas Reserves" and Appendix A attached hereto.
The Company's Development Program
---------------------------------
The C-D Field was discovered by the drilling of the C-1 and
D-1 Wells. The Field has been appraised by the C-2, C-2-2, C-2-2
sidetrack, C-3, D-2, and D-3 Wells. On the basis of the
calculated reserves, Apache and XCL have prepared an Overall
Development Program ("ODP") for the Field. The ODP presently
projects the drilling of 45 wells, of which 32 are producers, 8
are water injection wells for the purpose of reservoir pressure
maintenance to achieve higher levels of recovery of ultimate
reserves and 5 are water disposal wells. The ODP has been
approved by the Joint Management Committee ("JMC"), which
oversees operations on the Block, and has been approved by China
National Petroleum Company ("CNPC") subject to certain
modifications that XCL and Apache are studying. CNODC has given
notice that it will participate as to its full 51% share in the C-
D Field.
XCL, Apache and CNODC are currently collaborating on
engineering studies to refine the ODP, both to reduce capital
commitments for development and to accelerate production. It is
expected that these studies will assist the parties in
determining the most efficient method for development, including
the practicability of beginning production before all development
operations have been completed. The Company has been informed by
CNODC that they desire that production on the Block begin in 1998
and the parties are assessing how and whether that would be
commercially feasible. Initial results indicate that 1998
production is possible and the Company, Apache and CNODC have
decided to attempt to commence initial production in 1998.
XCL's current estimate (which is subject to revision as the
project moves forward) of the costs to develop the reserves in
the C-D Field that are identified in the ODP by the Operator
(which are higher than the reserves identified by XCL's petroleum
engineers) is approximately $185 million (of which XCL's share
would be approximately $45.3 million). This is less than amounts
projected earlier by the Operator in the original ODP in part
because of the initial inclusion in the ODP estimates of large
contingencies, which all parties believe are too high. In
addition, cost reductions are expected in part based on design
changes that would eliminate one drilling platform and one
production platform from the ODP. While formal Chinese approval
for these changes has not yet been obtained, all parties believe
that such approval can be secured. Further, cost reductions are
expected as a result of preliminary bids that suggest that cost
estimates in the ODP have been too high. Cost reductions from the
Operator's projections are also based on the assumption that if
the project moves forward with dispatch, the current weakness of
certain Asian currencies could result in substantial reductions
in the costs of steel and fabrication for the project.
The revised ODP design anticipates that once production and
loading facilities have been installed in the field, wells will
be placed on production as they are drilled. In this case, cash
flow from this production would be available to fund part of
XCL's capital requirements for the development of the C-D Field.
The Company's financial plans include the use of such cash flow
as part of the Company's source of funds.
Production tests of the C-4 Well, announced by XCL on
October 7, 1997, indicate a combined daily rate from 8 zones of
15,359 barrels per day, and 6,107 Mcf of gas, plus a ninth zone
daily rate of 4,600 Mcf and 14 barrels of condensate. This well
suggests a new field discovery on the Block. CNODC, XCL, and
Apache have agreed to drill a well in 1998 to appraise the C-4
Well. If this proves successful, early production from the two
initial wells in the C-4 Well area may begin in late 1998;
initial feasibility studies indicate that this is possible. The
capital costs attributable to such early production are not
included in the 1998 work program and budget. Successful
appraisal of the C-4 Well could also cause XCL and Apache to move
promptly toward development of this area.
The Company's Additional Ventures
---------------------------------
The Company is also proceeding with certain other energy
related ventures in China, including a joint venture with CNPC
United Lube Oil Corporation to engage in the manufacturing,
distribution and marketing of lubricating oil in China and
Southeast Asian markets and a cooperative venture with the China
National Administration of Coal Geology to explore and develop
coalbed methane in two areas of China. See "Business --
United/XCL Lube Oil Joint Venture" and "-- Coalbed Methane
Project."
Securities the Resale of Which are Being Registered
---------------------------------------------------
This Prospectus offers for resale the following issued and
outstanding Securities and Securities to be issued upon exercise
or conversion of certain outstanding Securities and Warrants.
See "Selling Security Holders."
Amended Series A Preferred Stock
- --------------------------------
294,118 Shares issued in an Equity Offering on May 20, 1997.
11,816 Shares issued in partial payment of
interest payable on the Company's Secured
Subordinated Notes due April 5, 2000 (the
"Subordinated Debt"), which were paid in full on
October 15, 1997.
726,907 Shares issued on recapitalization of the
Series A Preferred Stock into shares of Amended
Series A Preferred Stock and the payment of
accrued and unpaid dividends thereon.
63,706 Shares issued on recapitalization of the
Series E Preferred Stock into shares of Amended
Series A Preferred Stock and the payment of
accrued and unpaid dividends thereon.
12,918 Shares issued in payment of dividends on
the Amended Series A Preferred Stock payable
November 1, 1997.
53,650 Shares issuable in payment of dividends
on the Amended Series A Preferred Stock payable
May 1, 1998.
__________
1,163,115 Shares of Amended A Preferred Stock being
registered for resale.
Common Stock
- ------------
1,999,286 Shares of Common Stock currently
outstanding issued between April 1996 and April
27, 1998 as follows:
719,173 Shares issued in payment of
interest payable on Subordinated Debt.
4,858 Shares issued in payment of a
finders fee for Regulation S Offerings
conducted in Europe in December 1995,
March 1996 and April 1996.
584,696 Shares issued upon exercise of
various stock purchase warrants.
30,000 Shares issued in settlement of litigation.
26,666 Shares issued in partial
payment of a consulting fee.
633,893 Shares issued upon conversion of
all the outstanding shares of the
Company's Series F, Cumulative
Convertible Preferred Stock ("Series F
Preferred Stock").
170,383 Shares issuable to meet various contractual
obligations of the Company.
13,181,970 Shares issuable upon conversion of the
outstanding Amended Series A Preferred Stock.
6,411,772 Shares issuable upon exercise of the Equity
Warrants issued in the Equity Offering on May 20,
1997.
6,400,000 Shares issuable upon exercise of the Note
Warrants issued in the Note Offering on May 20,
1997.
1,280,511 Shares issuable upon the exercise of
Warrants issued to Jefferies as an investment
banking fee in connection with the Equity and the
Note Offerings on May 20, 1997.
2,515,514 Shares issuable upon exercise of various
outstanding Warrants with exercise prices ranging
from $.15 per share to $7.50 per share.
991,262 Shares issuable upon conversion of Amended
Series B, Cumulative Convertible Preferred Stock
("Amended Series B Preferred Stock").
----------
32,950,698 Shares of Common Stock being registered for
resale.
Terms of the Securities
-----------------------
Common Stock
- ------------
Common Stock Issued and Outstanding...22,995,804 shares
(See "Description of Capital Stock
-- Common Stock")
Amended Series A
Preferred Stock
---------------
Amended Series A Preferred Stock
Outstanding...................1,183,115 shares
Dividends.....................Dividends are cumulative from May 20, 1997
(the "Issue Date") at the annual
rate of $8.075 per share.
Dividends are payable on each May 1
and November 1, when, as and if
declared by the Board of Directors.
Dividends are payable in additional
shares of Amended Series A
Preferred Stock (valued at $85.00
per share) through November 1,
2000, and thereafter in cash or, at
the election of the Company, in
shares of Amended Series A
Preferred Stock (valued at $85.00
per share). See "Description of
Capital Stock -- Preferred Stock -
- Amended Series A Preferred Stock
-- Dividend Rights."
Liquidation Preference....... $85.00 per share, plus accrued
and unpaid dividends. See
"Description of Capital Stock --
Preferred Stock -- Amended Series
A Preferred Stock -- Liquidation
Rights."
Conversion Rights.............Convertible at any time after May 20,
1998, at the option of the holder,
unless previously redeemed, into
shares of Common Stock at a
conversion price of $7.50 per share
of Common Stock. (This is
equivalent to a conversion rate of
11 whole shares of Common Stock per
share of Amended Series A Preferred
Stock.) Conversion price is subject
to adjustment upon the occurrence
of certain events. See "Description
of Capital Stock -- Preferred Stock
--- Amended Series A Preferred
Stock -- Conversion Rights."
Mandatory Conversion Right....The Company may, at its
election, require the conversion of
all the outstanding shares of
Amended Series A Preferred Stock at
any time after November 20, 1997
that the Common Stock has traded
for 20 trading days during any 30
consecutive trading days at a
Market Price (as defined below)
equal to or greater than 150% of
the prevailing conversion price.
See "Description of Capital Stock -
- Preferred Stock -- Amended
Series A Preferred Stock --
Mandatory Conversion Rights."
Special Conversion Rights.....The conversion price of the
Amended Series A Preferred Stock
will be reduced for a limited
period in certain circumstances. In
general, the reduction will occur
if a Change of Control (as defined
below) or a Fundamental Change (as
defined below) occurs at a time
when the Market Value of the Common
Stock is below the then prevailing
conversion price. No adjustment
will occur upon a Fundamental
Change if a majority of the
consideration received by the
holders of Common Stock consists
solely of Marketable Stock (as
defined below) and under certain
other circumstances. See
"Description of Capital Stock --
Preferred Stock -- Amended Series A
Preferred Stock -- Special
Conversion Rights."
Optional Redemption...........Redeemable, in whole or in part, at
the option of the Company, on or
after May 1, 2002, initially at a
redemption price of $90.00 per
share and, thereafter, at prices
declining to $85.00 per share on
and after May 1, 2006, plus all
accrued and unpaid dividends, if
any, to the redemption date. See
"Description of Capital Stock --
Preferred Stock -- Amended Series A
Preferred Stock -- Optional
Redemption."
Mandatory Redemption..........Mandatorily Redeemable, in whole,
on May 1, 2007, at a redemption
price of $85.00 per share, plus
accrued and unpaid dividends to the
redemption date, payable in cash
or, at the election of the Company,
in Common Stock. See "Description
of Capital Stock -- Preferred Stock
-- Amended Series A Preferred Stock
-- Mandatory Redemption."
Voting Rights.................In addition to any special voting rights
granted by law, each share of
Amended Series A Preferred Stock
entitles the holder thereof to cast
the same number of votes as the
shares of Common Stock then
issuable upon conversion thereof on
any matter subject to the vote of
the Common Stockholders (currently
11 votes per share), and (i) the
holders of the Amended Series A
Preferred Stock will be entitled to
vote as a separate class to elect
two directors if the equivalent of
three semi-annual dividends payable
on the Amended Series A Preferred
Stock (whether consecutive or not)
are in arrears, which rights will
continue until the dividend
arrearage has been paid in full,
and (ii) the approval of the
holders of two-thirds of the then
outstanding Amended Series A
Preferred Stock will be required
for the issuance of any class or
series of stock ranking prior to
the Amended Series A Preferred
Stock as to dividends or
liquidation rights and for certain
amendments to the Company's Amended
and Restated Certificate of
Incorporation that adversely affect
the rights of holders of the
Amended Series A Preferred Stock.
See "Description of Capital Stock -
- Preferred Stock -- Amended Series
A Preferred Stock -- Voting
Rights."
Priority of Amended Series A
Preferred Stock..........The Amended Series A Preferred
Stock has priority over the Common
Stock with respect to the payment
of dividends and upon liquidation,
dissolution or winding up of the
Company.
AMEX symbols - Common Stock
and Amended Series A Preferred
Stock.........................XCL; It is anticipated that the Amended Series A
Preferred Stock will be listed on
the AMEX and will trade separately
immediately after the date hereof
under the symbol [o].
For additional information regarding the Common Stock and
Amended Series A Preferred Stock, see "Description of Capital
Stock -- Common Stock" and "-- Preferred Stock -- Amended Series
A Preferred Stock."
Risk Factors
------------
See "Risk Factors" for a discussion of certain factors that
should be considered in evaluating an investment in the
Securities.
Summary Historical Financial Information
----------------------------------------
The following table represents summary historical
consolidated financial data of the Company. The balance sheet
data as of December 31, 1997, has been derived from the audited
consolidated financial statements of the Company. The
information in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Selected Consolidated Financial Data,"
the Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1993(a) 1994(b) 1995(c) 1996(e) 1997(g)
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 8,499 $ 4,336 $ 2,480 $ 1,136 $ 236
Operating expenses 2,449 1,341 985 342 210
General and administrative expenses 3,840 4,553 4,551 3,487 4,910
Depreciation, depletion and
amortization 5,788 3,292 2,266 579 126
Operating loss (12,518) (33,875) (85,673) (9,793) (8,058)
Net interest expense 1,329 1,831 2,998 2,415 8,450
Interest income 141 508 133 8 2,212
Net loss (15,197) (36,622) (87,837) (12,074) (13,994)
Net loss attributable to common
stock (19,978) (41,529) (92,658) (17,430) (27,722)
Net loss per common share
Basic (2.52) (3.14) (5.77) (0.98) (1.36)
Diluted (2.52) (3.14) (5.77) (0.98) (1.36)
Weighted average common
shares outstanding - basic 7,933 13,220 16,047 17,705 20,451
Weighted average common
shares outstanding - diluted 7,933 13,220 16,047 17,705 20,451
Deficiency of earnings to combined
fixed charges and preferred
stock dividends (i) (i) (i) (i) (i)
Balance Sheet Data (at end of
period):
Total working capital (deficit) $ (15,562) $ (1,563) $ (24,239) $ (46,705) $ 22,399
Total assets 157,377 149,803 72,336 60,864 119,089
Long-term debt, net of current
maturities 53,965 (d) 41,607(d) 15,644 -- (f) 61,310 (h)
Stockholders' equity 84,609 95,200 16,900 11,041 40,825
</TABLE>
____________
(a) Includes provision for impairment of domestic oil and gas
properties of $8 million.
(b) Includes provision for impairment of domestic 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.
(c) Includes provision for impairment of domestic oil and gas
properties of $75.3 million and provision for write-down of
other assets of $4.5 million.
(d) Includes non-recourse debt of an aggregate $0.7 million
and $3.7 million as of December 31, 1994 and 1993,
respectively, included in the Lutcher Moore Debt.
(e) Includes provision for impairment of domestic oil and gas
properties of $3.85 million; provision for write-down of
investment of $2.4 million; and loss on sale of investments
of $0.7 million.
(f) All of the Company's debt ($38.02 million) was classified
as currently due at December 31, 1996.
(g) Includes extraordinary loss for early extinguishment of
debt of $551,000.
(h) Long term debt is net of unamortized discount of $13,690
associated with the value allocated to the stock purchase
warrants issued with the Senior Secured Notes.
(i) The earnings were inadequate to cover combined fixed
charges and Preferred Stock dividends. The dollar amount of
the coverage deficiency was $21.3 million in 1993; $43.3
million in 1994; $95.7 million in 1995; $19.8 million in
1996; and $36.1 million in 1997.
RISK FACTORS
In addition to the other information in this Prospectus, the
following factors should be carefully evaluated before buying any
Securities covered by this Prospectus. See also the discussion on
page [3] entitled "Disclosure Regarding Forward-Looking
Statements."
High Degree of Leverage
- -----------------------
The Company is currently highly leveraged. Future
operations will be significantly affected by its level of
indebtedness. Much of its cash flow from operations will be
dedicated to interest payments. Large amounts of money will be
required to continue its operations in China. Covenants in the
Indenture governing the Notes (the "Indenture") require the
Company to meet certain financial tests and limit the Company's
ability to dispose of assets or to borrow additional funds. These
covenants may affect the Company's business flexibility, and
could possibly limit acquisition activity.
The Company's ability to meet its debt service obligations
and to reduce its indebtedness will depend upon its future
performance. This, in turn, will depend upon successful
completion of the activities called for in the ODP, the Company's
access to additional capital, general economic conditions, as
well as on financial, business, and other factors, many of which
are beyond the Company's control.
Restrictions Imposed by Terms of the Company's Indebtedness
- -----------------------------------------------------------
The Indenture restricts, among other things, the Company's
ability to incur additional debt, incur liens, pay dividends, or
make certain other restricted payments. It also limits the
Company's ability to consummate certain asset sales, enter into
certain transactions with affiliates, enter into mergers or
consolidations, or dispose of substantially all the Company's
assets. The Company's ability to comply with such covenants may
be affected by events beyond its control. The breach of any of
these covenants could result in a default. A default could allow
holders of the Notes to declare all amounts outstanding and
accrued interest immediately due and payable. Absent such
payment, the holders could proceed against any collateral granted
to them to secure such indebtedness, which includes all of the
stock of the Company's principal operating subsidiary, XCL-China
Ltd. ("XCL-China"), which has guaranteed such indebtedness. A
foreclosure on the stock of XCL-China could trigger Apache's
right of first refusal under the Participation Agreement to
purchase such stock or its option to purchase the Company's
interest in the Contract. There can be no assurance that the
assets of the Company and XCL-China (a "Subsidiary Guarantor"),
or any other Subsidiary Guarantors would be sufficient to fully
repay the Notes and the Company's other indebtedness. See
"Description of Existing Debt."
Oil and Gas Properties; Capital Expenditures
- --------------------------------------------
The Company's total reserves, as of December 31, 1997, were
all classified as proved and unevaluated, on a BOE basis.
Recovery of such reserves will require both significant capital
expenditures and successful drilling, completion and production
operations. The Company will also have additional capital
expenditures for exploration activity on the Block.
The Company plans to generate the additional cash needed
through the sale or financing of its domestic assets held for
sale and the completion of additional equity, debt or joint
venture transactions. There is no assurance, however, that the
Company will be able to sell or finance its assets held for sale
or to complete other transactions in the future on commercially
reasonable terms, if at all, or that it will be able to meet its
future contractual obligations. If production from the oil and
gas properties commences in late 1998 or the first half of 1999,
as anticipated, the Company's proportionate share of the related
cash flow will be available to help satisfy cash requirements.
However, there is likewise no assurance that such development
will be successful and production will commence, and that such
cash flow will be available. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Liquidity, Capital Resources and Management's Plans" and "Use of
Proceeds." The Company's failure to meet certain financial
obligations under the Joint Operating Agreement between the
Company and Apache (in addition to certain other actions) may
trigger Apache's option to purchase the Company's interest in the
Contract. See "Business -- Apache Farmout."
Reliance on Estimates of Proved Reserves and Future Net Revenue
- ---------------------------------------------------------------
The reserve data included in this Prospectus are only
estimates and may not prove to be correct. In addition,
estimates of future net revenue from proved reserves are also
estimates that may not prove to be correct. In particular,
estimates of crude oil and natural gas reserves, future net
revenue from proved reserves and the PV-10 thereof for the crude
oil and natural gas properties described in this Prospectus are
based on the assumption that the Block is developed in accordance
with the ODP, modified to accelerate production and reduce costs,
and that future crude oil prices for production from the Block
remain at least at the levels assumed for December 31, 1997.
These assumptions include an assumption that the Company will
receive a premium for the C-D Field oil because of its potential
for use as a lubricating oil base stock, the Company's 49%
ownership in the CNPC lubricating oil joint venture and the
Company's right under the joint venture to market both
lubricating oil and lubrication oil feed stock. These assumptions
may prove to be inaccurate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Liquidity, Capital Resources and Management's Plans" and
"Business -- Oil and Gas Reserves."
Foreign Operations
- ------------------
The Company's future operations and earnings will depend
upon the results of the Company's operations in China. If these
operations are not successful, the Company's financial position,
results of operations and cash flows will suffer greatly.
The success of the Company's operations is subject to many
matters beyond management's control, like general and regional
economic conditions, prices for crude oil and natural gas,
competition, and changes in regulation. Also, since the Company
is dependent on international operations, specifically those in
China, it will be subject to various additional political,
economic and other uncertainties. The Company's operations will
be subject to the risks of restrictions on transfer of funds;
export duties, quotas and embargoes; domestic and international
customs and tariffs; and changing taxation policies, foreign
exchange restrictions, political conditions, and governmental
regulations.
The United States government has publicly criticized China
from time to time with respect to various matters. The Company
cannot predict whether political developments like these will
adversely affect the Company's Chinese operations. The Company
believes that neither the Chinese nor the U.S. government wants
to impair U.S.-Chinese commercial relations. The Company has
excellent relations with Chinese governmental authorities in
charge of the development of China's energy resources.
In recent months there have been substantial disruptions in
several Asian financial markets and many Asian currencies have
undergone significant devaluations. These events can be expected
to have negative near, and possibly long term, effects on the
flow of investment capital into and out of Asian denominated
assets. As of this time, China has been largely unaffected by
these events. However, it is impossible to predict the ultimate
outcome of these events and their possible negative effect on the
Company's investments in China.
History of Losses
- -----------------
The Company has experienced recurring losses. For the years
ended December 31, 1993, 1994, 1995, 1996 and 1997, the Company
recorded net losses of approximately $15.2 million, $36.6
million, $87.8 million, $12.1 million and $14 million,
respectively. See "Selected Financial Data." There can be no
assurance that the Company will be profitable in the future. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial
Statements and the notes thereto included elsewhere in this
report.
Volatility of Oil and Gas Prices; Impact on Company's Profitability
- -------------------------------------------------------------------
The Company's revenue, profitability and future rate of
growth are substantially dependent upon prevailing prices for
crude oil and natural gas. Crude oil and natural gas prices can
be extremely volatile and in prior years have been depressed by
excess total supplies. Prices are also affected by actions of
the United States and foreign governments and international
cartels. Further, prices are often seasonal. There can be no
assurance that current levels for crude oil and natural gas
prices can be sustained. Any substantial or extended decline in
such prices would have a material adverse effect on the Company's
financial condition and results of operations, including reduced
cash flow and borrowing capacity.
Operating Hazards; Uninsured Risks
- ----------------------------------
The nature of the crude oil and natural gas business
involves many operating hazards such as crude oil and natural gas
blowouts, explosions, encountering formations with abnormal
pressures, cratering and crude oil spills and fires, and
inclement weather. Any of these could result in damage to or
destruction of crude oil and natural gas wells, destruction of
producing facilities, damage to life or property, suspension of
operations, environmental damage and possible liability to the
Company. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, of such
risks and losses. The Company does not maintain any insurance
against the risks of expropriation and nationalization of its
business interests in China. The occurrence of such an event not
fully covered by insurance could have a material adverse effect
on the financial condition and results of operations of the
Company.
Competition
- -----------
The oil and gas industry is marked by strong competition
from major oil companies and independent operators in acquiring
properties and leases for the exploration for, and production of,
crude oil and natural gas. Competition is particularly intense
with respect to the acquisition of desirable undeveloped crude
oil and natural gas properties. The Company anticipates such
competition in connection with any expansion of its activities in
China. The principal competitive factors in the acquisition of
such undeveloped crude oil and natural gas properties include the
staff and data necessary to identify, investigate and acquire
interests in such properties, close working relationships with
governmental authorities who control acquisition, exploration,
production and marketing activities in China, and the financial
resources necessary to acquire and develop such properties. Many
of the Company's competitors have substantially greater financial
resources, staff and facilities.
The principal raw materials and resources necessary for the
exploration and production of crude oil and natural gas are
interests in prospective properties, drilling rigs and related
equipment to explore for such reserves and knowledgeable
personnel to conduct all phases of crude oil and natural gas
operations. The Company must compete for such raw materials and
resources with both major integrated energy companies and
independent operators. Although the Company believes that its
current operating and financial resources are adequate to
preclude any significant disruption of its operations in the
immediate future, the continued availability of such materials
and resources to the Company cannot be assured.
Depletion of Reserves
- ---------------------
The rate of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the
extent the Company acquires additional properties containing
proved reserves, conducts successful exploration and development
activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, the proved
reserves of the Company will decline as reserves are produced.
Future crude oil and natural gas production is therefore highly
dependent upon the Company's level of success in acquiring or
finding additional reserves. See Appendix A attached hereto.
Government Regulation
- ---------------------
The Company's business is subject to certain Chinese and
United States federal, state, and local laws and regulations
relating to the exploration for and development, production and
marketing of crude oil and natural gas, as well as environmental
and safety matters. In addition, the Chinese government
regulates various aspects of foreign company operations in China.
Such laws and regulations have generally become more stringent in
recent years in the United States, often imposing greater
liability on a larger number of potentially responsible parties.
It is not unreasonable to expect that the same trend will be
encountered in China. Because the requirements imposed by such
laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. There is no
assurance that laws and regulations enacted in the future will
not adversely affect the Company's financial condition and
results of operations.
Dependence on Key Personnel
- ----------------------------
The Company depends to a large extent on Marsden W. Miller,
Jr., its Chairman of the Board and Chief Executive Officer, for
its management and business and financial contacts in China and
its relationship with Chinese authorities. See "Management." The
unavailability of Mr. Miller would have a material adverse effect
on the Company's business. The Company's success is also
dependent upon its ability to retain skilled technical personnel.
While the Company has not to date experienced difficulties in
employing or retaining such personnel, its failure to do so in
the future could adversely affect its business. The Company does
not maintain key man life insurance on any of its executives or
other personnel.
Limitations on the Availability of the Company's Net Operating Loss
Carryforwards
- -------------------------------------------------------------------
The Company has incurred net operating loss ("NOL")
carryforwards as at December 31, 1997 of $183 million. Use of
the NOLs by the Company are subject to limitations under Section
382 of the Internal Revenue Code of 1986 relating to ownership
changes. The various stock offerings made by the Company may have
triggered those limits. Also uncertainties as to the future use
of the NOLs exist under the criteria set forth in Financial
Accounting Standards Board ("FASB") Statement No. 109,
"Accounting for Income Taxes." The Company established a
valuation allowance of $81.1 million and $83.6 million for
deferred tax assets at December 31, 1996 and 1997, respectively.
Lack of Public Market
- ---------------------
There is no current public market for the Amended Series A
Preferred Stock. It is anticipated that the Amended Series A
Preferred Stock will be listed for trading on the AMEX and will
trade separately immediately after the date hereof under the
symbol "[]." There can be no assurance, however, that an active,
liquid market in such stock will develop.
Possible Volatility of Price of the Common Stock
- ------------------------------------------------
The market price of the Common Stock and Amended Series A
Preferred Stock could be subject to wide fluctuations in response
to quarterly variations in the Company's results of operations,
changes in earnings estimates by analysts, conditions in the oil
and gas industry or general market or economic conditions.
No Cash Dividends
- -----------------
The Company has not paid any cash dividends to date on the
Common Stock and there are no plans for such dividend payments on
its Preferred Stock or Common Stock in the foreseeable future.
The Indenture also limits cash dividends on the Company's equity
securities. So long as there are dividend defaults on the
outstanding shares of Preferred Stock, under the terms of such
Stock the Company is restricted from paying cash dividends on the
Common Stock. See "Price Range of Common Stock," "Dividend
Policy," "Description of Existing Debt" and "Description of
Capital Stock -- Preferred Stock."
Possible Delisting of Common Stock
- ----------------------------------
The AMEX has, since November 1996, continued to review the
Company's listing eligibility since the Company has not met
certain financial requirements for continued listing. The Company
intends to try to satisfy the Exchange's concerns. In the event
the Common Stock is delisted from the AMEX (which would
presumably also include delisting of the Amended Series A
Preferred Stock), the liquidity of the Securities and the
Company's ability to continue funding its activities through the
sale of securities may be significantly impaired.
Certain Anti-takeover Provisions
- --------------------------------
A Change of Control or other Fundamental Change gives
holders of Amended Series A Preferred Stock special conversion
rights for 45 days. These rights are intended to provide those
holders with limited loss protection in certain circumstances.
The rights may also render more costly or otherwise discourage
certain takeovers or other business combinations. See
"Description of Capital Stock -- Preferred Stock -- Amended
Series A Preferred Stock -- Special Conversion Rights."
The Company's Amended and Restated Certificate of
Incorporation contains provisions that the Board of Directors
believes may impede or discourage a takeover of the Company
without the support of the incumbent Board. See "Description of
Capital Stock -- Common Stock -- Special Charter and By-Law
Provisions."
Year 2000 Compliance
- --------------------
The Company has conducted a review of its computer systems
to identify the systems that could be affected by the "Year 2000"
issue. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year and equipment with time-sensitive embedded
components. Any of the Company's programs that have time-
sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system
failure or miscalculations. Although no assurance can be given
because of the potential wide scale manifestations of this
problem which may affect the Company's business, XCL presently
believes that the Year 2000 problem will not pose significant
operational problems for its computer systems and that the Year
2000 problem will not have a material impact on its costs of
operations. The Company also may be vulnerable to other
companies' Year 2000 issues. The inability of the Company or any
of its principal vendors or customers to become Year 2000
compliant in a timely manner could have a material adverse effect
on the Company's financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance."
FINANCIAL RESTRUCTURING
The Company has recently taken steps to simplify its capital
structure. Effective November 10, 1997, the Company recapitalized
and combined the Series A and E Preferred Stock into an aggregate
of 790,163 shares of Amended Series A Preferred Stock (including
accrued and unpaid dividends paid in kind). There are currently
1,183,115 shares of Amended Series A Preferred Stock issued and
outstanding with an aggregate liquidation preference of
approximately $101 million. Effective January 16, 1998, the
Series F Preferred Stock was mandatorily converted into an
aggregate of 633,893 shares of Common Stock. On March 3, 1998,
the Company settled litigation instituted by the holder of its
Series B, Cumulative Preferred Stock (the "Series B Preferred
Stock"). The holder revoked and withdrew its redemption notice
and sold its shares of Series B Preferred Stock and accompanying
warrants. The purchasers exchanged the stock and warrants for
44,465 shares of Amended Series B, Cumulative Convertible
Preferred Stock ("Amended Series B Preferred Stock") and warrants
to purchase 250,000 shares of Common Stock, subject to
adjustment, and received 2,620 shares of Amended Series B
Preferred Stock in payment of all accrued and unpaid dividends on
the Series B Preferred Stock. See "Business -- Litigation." For a
description of the material terms of the Amended Series A
Preferred Stock and the Amended Series B Preferred Stock, see
"Description of Capital Stock -- Preferred Stock -- Amended
Series A Preferred Stock" and "--Amended Series B Preferred
Stock."
USE OF PROCEEDS
Each Selling Security Holder will receive all of the net
proceeds from the sale of the Securities owned by such Selling
Security Holder. The Company will not receive any proceeds from
the sale of any Securities, although the Company will receive the
proceeds from any exercise of the Warrants. However, there can
be no assurance that the Warrants will be exercised. Assuming
all of the Warrants are exercised, the net proceeds to the
Company would be approximately $64 million. The proceeds from
such Warrant exercises, if any, will be used by the Company to
fund its China projects and for general working capital purposes.
CAPITALIZATION
The following table sets forth the total consolidated
capitalization of the Company at December 31, 1997. This table
should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto and the other
financial information included elsewhere in this Prospectus.
(in thousands)
Lutcher Moore Group limited recourse debt $ 2,524
Total debt, including current maturities:
13.50% Senior Secured Notes due
May 1, 2004, net of unamortized discount 61,310
---------
Total debt $ 63,834
---------
Shareholders' equity:
Preferred stock
Amended Series A Preferred Stock 1,129
Series B Preferred Stock 45
Series F Preferred Stock 22
Common Stock(1) 217
Treasury stock (69,471 shares) (1)
Unearned compensation (12,021)
Additional paid-in capital 298,588
Accumulated deficit (247,154)
---------
Total shareholders' equity $ 40,825
---------
Total capitalization $ 104,659
=========
_______________________
(1) Excludes shares of Common Stock issuable upon conversion
of Preferred Stock or exercise of outstanding options and
warrants at December 31, 1997. See "Description of Capital
Stock."
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the AMEX under the symbol "XCL"
and on the London Stock Exchange. The following table shows the
range of the quarterly high and low sales prices on the AMEX to
date during 1998 and for each quarter during 1997 and 1996. On
December 17, 1997 the Company effected a one-for-fifteen reverse
stock split of its Common Stock (the "Reverse Stock Split"). The
high and low prices for the periods shown have been adjusted to
reflect that Reverse Stock Split.
1998 High Low
- ---- ---- ---
First Quarter $ 6.50 $ 3.50
Second Quarter
(through April 30, 1998) 4.94 3.89
1997
- ----
First Quarter $ 5.63 $ 2.81
Second Quarter 4.69 2.81
Third Quarter 6.56 2.81
Fourth Quarter 13.13 3.88
1996
- ----
First Quarter $ 6.60 $ 2.85
Second Quarter 7.50 2.85
Third Quarter 5.70 1.95
Fourth Quarter 3.75 1.95
On April 30, 1998, the closing price for the
Common Stock on the AMEX was $4.00. As of April 30, 1998, the
Company had approximately 3,600 shareholders of record with
respect to its Common Stock.
DIVIDEND POLICY
XCL has not paid any cash dividends on the Common Stock to
date and has no plans for Common Stock cash dividend payments in
the foreseeable future. The payment of future dividends will
depend on the Company's future earnings and financial condition.
The Company is restricted from paying cash dividends on its
equity securities under the terms of the Indenture. In addition,
so long as there are any dividend defaults on the outstanding
shares of Preferred Stock, under the terms of such Stock the
Company is restricted from paying cash dividends on the Common
Stock. See "Risk Factors -- No Cash Dividends," "Description of
the Existing Debt" and "Description of Capital Stock -- Preferred
Stock" herein.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated
financial data of the Company for and at the end of each of the
five years ended December 31, 1997 derived from the audited
financial statements of the Company included elsewhere in this
Prospectus (except for 1994 and 1993 which are not included
herein) and, in the opinion of Management, reflect all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of that information. The
following table should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1993(a) 1994(b) 1995(c) 1996(e) 1997(g)
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 8,499 $ 4,336 $ 2,480 $ 1,136 $ 236
Operating expenses 2,449 1,341 985 342 210
General and administrative expenses 3,840 4,553 4,551 3,487 4,910
Depreciation, depletion and
amortization 5,788 3,292 2,266 579 126
Operating loss (12,518) (33,875) (85,673) (9,793) (8,058)
Net interest expense 1,329 1,831 2,998 2,415 8,450
Interest income 141 508 133 8 2,212
Net loss (15,197) (36,622) (87,837) (12,074) (13,994)
Net loss attributable to common
stock (19,978) (41,529) (92,658) (17,430) (27,722)
Net loss per common share
Basic (2.52) (3.14) (5.77) (0.98) (1.36)
Diluted (2.52) (3.14) (5.77) (0.98) (1.36)
Weighted average common
shares outstanding - basic 7,933 13,220 16,047 17,705 20,451
Weighted average common
shares outstanding - diluted 7,933 13,220 16,047 17,705 20,451
Deficiency of earnings to combined
fixed charges and Preferred
Stock dividends (i) (i) (i) (i) (i)
Balance Sheet Data (at end of
period):
Total working capital (deficit) $ (15,562) $ (1,563) $ (24,239) $ (46,705) $ 22,399
Total assets 157,377 149,803 72,336 60,864 119,089
Long-term debt, net of current
maturities 53,965 (d) 41,607(d) 15,644 -- (f) 61,310 (h)
Stockholders' equity 84,609 95,200 16,900 11,041 40,825
</TABLE>
_______________________
(a) Includes provision for impairment of domestic oil and gas
properties of $8 million.
(b) Includes provision for impairment of domestic 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.
(c) Includes provision for impairment of domestic oil and gas
properties of $75.3 million and provision for write-down of
other assets of $4.5 million.
(d) Includes non-recourse debt of an aggregate $0.7 million
and $3.7 million as of December 31, 1994 and 1993,
respectively, included in the Lutcher Moore Debt.
(e) Includes provision for impairment of domestic oil and gas
properties of $3.85 million; provision for write-down of
investment of $2.4 million; and loss on sale of investments
of $0.7 million.
(f) All of the Company's debt ($38.02 million) was classified
as currently due at December 31, 1996.
(g) Includes extraordinary loss for early extinguishment of
debt of $551,000.
(h) Long term debt is net of unamortized discount of $13,690
associated with the value allocated to the stock purchase
warrants issued with the Senior Secured Notes.
(i) The earnings were inadequate to cover combined fixed
charges and Preferred Stock dividends. The dollar amount of
the coverage deficiency was $21.3 million in 1993; $43.3
million in 1994; $95.7 million in 1995; $19.8 million in
1996; and $36.1 million in 1997.
SUMMARY OF OIL AND GAS RESERVE DATA
Based on the wells drilled to date, Gruy has projected gross
proved undeveloped reserves for the segments of the C-D Field
drilled to date of 46.26 million barrels of recoverable oil.
CNODC has exercised its option to pay 51% of all development
costs and receive 51% of oil production. Consequently, the
Company's net interest in such proved undeveloped reserves is
estimated to be approximately 11.76 million barrels of oil with a
PV-10 of $62.5 million as of January 1, 1998. The Company
believes that the C-D Field and the remainder of the Block hold
the potential for additional significant increases in oil
reserves. See "Risk Factors -- Reliance on Estimates of Proved
Reserves and Future Net Revenue" and the Gruy Report which is
attached hereto as Appendix A.
Production, Sales and Cost Data
- -------------------------------
The following table sets forth certain information regarding
the production volumes, revenues, average prices received and
average production costs associated with the Company's sale of
oil and gas from properties held for sale for the periods
indicated.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Net Production: (a)
Gas (MMcf)..................... 72 467 1,474
Oil (MBbl)..................... 4 9 19
Gas equivalent (MMcfe)......... 95 522 1,588
Oil and gas sales ($ in 000's)(b)
Gas............................ $ 166 $ 955 $ 1,953
Oil and other.................. 70 181 527
----- ------ ------
Total oil and gas sales.... $ 236 $ 1,136 $ 2,480
===== ====== ======
Average sales price:
Gas ($ per Mcf)................ 2.28 1.84 1.33
Oil ($ per Bbl)................ 18.34 19.80 19.58
Gas equivalent ($ per Mcfe).... 2.47 2.18 1.56
Oil and gas costs ($ per Mcfe):
Production expenses and taxes.. 2.41 0.74 0.71
Depreciation, depletion and amortization
of oil and gas properties...... 0.81 0.96 1.23
________________
(a) Excludes gas consumed in operations.
(b) Includes plant products recovered from treating and
processing operations.
The following table shows the 1997 production of oil and
natural gas liquids and natural gas by major fields. All of the
Company's net production was attributable to the Cox Field and
the Frenier Field (on the Lutcher Moore Tract).
1997 Net Production
-----------------------
(MBbls) (MMcf)
---------- ----------
Field Oil % Gas %
- ----- --- --- --- ---
Cox Field............. -- -- 72 100
Frenier Field......... 4 100 -- --
Oil and Gas Acreage
- -------------------
The oil and gas acreage in which the Company has leasehold
or other contractual interest at December 31, 1997, and which are
not classified as assets held for sale are summarized in the
following table. "Gross" acres are the total number of acres
subject to the Contract. "Net" acres are gross acres multiplied
by the Company's fractional share of the costs of production
before CNODC's reversionary interest.
Undeveloped
-------------
Gross Net
----- ----
The People's Republic of China...... 48,677 24,338
Drilling Activity
- -----------------
The following tables set forth wells drilled by the Company
in the periods indicated.
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------- ------------- ------------
United States Gross Net Gross Net Gross Net
- ------------- ----- --- ----- --- ----- ---
Exploratory:
Productive...... -- -- -- -- -- --
Nonproductive... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total...... -- -- -- -- -- --
Development:
Productive....... -- -- -- -- 1 .2
Nonproductive.... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total....... -- -- -- -- 1 .2
Year Ended December 31,
------------------------------------------------
1997 1996 1995 (a)
-------------- ------------ -------------
The People's Republic
of China Gross Net Gross Net Gross Net
------------------ ----- --- ----- --- ----- ---
Exploratory:
Productive...... 2 1.0 1 0.5 2 1.0
Nonproductive... 1 0.5 -- -- 1 0.5
---- ---- ---- ---- ---- ----
Total...... 3 1.5 1 0.5 3 1.5
Development:
Productive....... -- -- -- -- -- --
Nonproductive.... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total....... -- -- -- -- -- --
____________
(a) Pursuant to the Second Participation Agreement dated May
10, 1995, between XCL and Apache, Apache's interest in the
Zhao Dong Block was increased from 33% to 50% of the Foreign
Contractor's interest.
Producing Well Data
- -------------------
At December 31, 1997, the Company had interests in 4
producing gas wells (3.45 net) in the Cox Field, which are
included in assets held for sale.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read
together with the Consolidated Financial Statements, the notes
thereto and the supplemental data included in this Prospectus.
References to Notes in this section of the Prospectus are to the
notes to the audited Financial Statements. See also the
discussion on page [3] entitled "Disclosure Regarding Forward-
Looking Statements."
Liquidity, Capital Resources and Management's Plans
- ---------------------------------------------------
Background
----------
The Company's management decided in the fourth quarter of
1995 to focus on the Company's operations in China and to sell
its other assets. The excellent well test results on the China
properties and the Company's reserve assessments support this
decision. The Company has, therefore, focused financially on (i)
raising funds to meet capital requirements for Chinese
operations, (ii) selling its other properties and (iii)
simplifying its capital structure to make it easier to raise
capital. The Company intends to continue these activities and to
work with Apache and CNODC to refine the ODP to reduce
expenditures and accelerate production.
The Company has made significant capital expenditures since
acquiring its interest in the Block in 1992. Despite incurring
losses since 1992, the Company, because of the high quality of
the Block, has been able to obtain all required funds for the
exploration and development of the Block. All of its contractual
obligations to CNODC and Apache have been met and the Company
believes that it will continue to do so.
The Company's opinion that it will be able to obtain the
funds necessary to pay its share of capital expenditures to the
point where cash flow is sufficient to pay costs is based on the
Company's assessment of the ultimate quantity of oil reserves
which will be produced from the Block. Presently proven gross oil
reserves under the Block of approximately 47 million barrels
represents only 6.5% of the Company's independent engineers'
estimates of approximately 725 million of ultimately recoverable
gross oil reserves in all categories of proven, probable,
possible and exploration. Additionally, the Company believes,
based on discussions with the Chinese authorities during the last
year, that it may acquire additional oil and gas exploration and
development blocks in China, with proven oil reserves, which will
further enhance the Company's ability to timely obtain adequate
funds for its obligations in China.
Additional funds may be available from a number of sources,
including cash flow from production on the Block, the sale or
recapitalization of the Lutcher Moore Tract and the other assets
held for sale, project financing, increasing the amount of senior
secured debt, supplier financing, additional equity, including
the exercise of currently outstanding warrants to buy common
stock and joint ventures with other oil companies. Based on
continuing discussions with major stockholders, investment
bankers, potential purchasers and other oil companies, the
Company believes that such funds will be available. There is no
assurance, however, that such funds will be available and, if
available, that they will be available on commercially reasonable
terms, or that sufficient cash flow will be available from the
Block. New debt will require approval of the holders of the
Company's long term debt. See "Risk Factors."
Liquidity and Capital Resources
-------------------------------
The Company offered and sold $75 million of Notes and $25
million of equity on May 20, 1997. During 1997 such funds were
used to pay costs of the offering, the Company's 1997 exploration
and development costs and $38 million of debt. At December 31,
1997, the Company had an unrestricted operating cash balance of
$22.0 million and restricted cash held in escrow for the payment
of interest on the Notes of $10.3 million. The Company had net
working capital of $22.4 million.
As a result of the Company's decision to focus on China and
sell its U.S. assets, the Company presently has no source of
material revenues. Revenues for 1997 were $236,000 versus
$1,136,000 in 1996. The Company incurred a loss for fiscal 1997
of $13,994,000 and expects to incur a loss in 1998 as well
because production and related cash flow from the Block is not
expected until late 1998 at the earliest.
Management's Plan
------------------
The Company's unrestricted cash will be required for working
capital and exploration, development and production expenditures
on the Block. CNODC has given written notice that it will
participate as to its full 51% share of the C-D Field and has
urged that production begin during 1998. Except for exploratory
wells on which Apache has an obligation to pay for the Company's
costs, the Company is required to fund 50% of all exploration
expenditures and 24.5% of all development and production
expenditures. The Company estimates that its share of actual
development expenditures for the C-D Field for the remainder of
1998 will be approximately $8 million, which is available from
current unrestricted cash reserves. The Company estimates that
its share of unpaid exploration expenses for the remainder of
1998 will be approximately $13 million. The Company presently
projects and plans that these funds will be available from
current unrestricted cash reserves and a portion of the proceeds
from the sale or refinancing of the Lutcher Moore Tract. The
Company estimates that its share of development expenses for 1999
will be approximately $22 million. After expenditure of those
1998 and 1999 projected development expenses, the Company
projects that proceeds from production will pay for additional
expenditures. After participation in the projected exploration
program for 1998, the Company presently projects and plans that
1999 development funds will be available from proceeds from a
portion of the sale of Lutcher Moore, a financing of the final
payment which Apache owes XCL for the 1995 purchase of an
additional 8.325% interest in the C Field and proceeds from the
early exercise of at least a portion of the currently outstanding
warrants to purchase common stock. Furthermore, although the
Company believes that by the end of 1998 all obligatory
exploration wells will have been drilled, the Company anticipates
that additional exploration wells will be drilled during 1999.
Funds for these exploratory wells will be obtained from the same
sources. Again, there is no assurance that the sources of funds
projected in this paragraph will be available. If not available,
the Company plans to utilize other sources of funds, as referred
to above under "Background."
Due to the successful results of the D-3 and C-4 Wells, the
1998 work program and budget exceed the Company's initial
preliminary projections earlier in 1997. This results from the
necessity of drilling at least one appraisal well offsetting the
C-4 exploratory well and the decision to extend the Contract into
its third exploratory period because of the successful drilling
of the D-3 and C-4 wells. XCL, Apache, and CNODC are working
together to reduce capital costs for the Block and to determine
whether the commencement of production from the C-4 Well area can
be accelerated into late 1998. This work has already resulted in
reductions of estimated capital costs of approximately $35
million based on a change in the conceptual design, and a
determination that it is technically feasible to commence
production from the C-4 well area in 1998. The Company, Apache
and CNODC have now all agreed to make every effort to achieve
initial production in 1998.
Longer term liquidity is dependent upon the Company's future
performance, including commencement of production in China, as
well as continued access to capital markets. In addition, the
Company's efforts to secure additional financing could be
impaired if its common stock is delisted from the AMEX.
Although the Company is not obligated to make any additional
capital payments to such projects, the Company may also have
capital requirements for its lubricating oil and coalbed methane
projects. The Company believes that both businesses will be
successful and grow and that the Company will make additional
investments in the businesses.
Other General Considerations
- ----------------------------
Pursuant to the Company's December 17, 1997 shareholders'
meeting, whereby several compensation plans were approved, the
Company recorded unearned compensation of approximately $12.8
million. This amount will be amortized ratably over future
periods of up to five years and is recorded as a non-cash expense
in the Statement of Operations. Because certain of these awards
are based on market capitalization there may be additional
amounts which may become payable. Approximately $0.9 million of
compensation expense was recorded in connection with these awards
during 1997.
The Company believes that inflation has had no material
impact on its sales, revenues or income during the reporting
periods. In light of increased oil and gas exploration activity
worldwide, and in the Bohai Bay in particular, increased rates
for equipment and services, and limited rig availability may have
an impact in the future.
The Company is subject to existing domestic and Chinese
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.
New Accounting Pronouncements
- -----------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which is effective for the Company's year
ending December 31, 1998. SFAS No. 130 establishes standards for
the reporting and displaying of comprehensive income and its
components. The Company will be analyzing SFAS No. 130 during
1998 to determine what, if any, additional disclosures will be
required.
In June 1997, the FASB Issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
is effective for the Company's year ended December 31, 1998.
This statement establishes standards for reporting of information
about operating segments. The Company will be analyzing SFAS No.
131 during 1998 to determine what, if any, additional disclosures
will be required.
Results of Operations
- ---------------------
1997 compared to 1996
- ---------------------
The Company incurred a loss of $14 million in 1997, as
compared with a loss of $12 million in 1996. Included in the
loss for 1997 is a charge of $0.9 million for non-cash
compensation charges, related to stock and appreciation options,
which are classified in general and administrative expenses. In
addition, 1997 includes a $2.8 million provision for estimated
settlements in connection with various disputes and litigation
matters. Such amount is reflected in Other in the Statement of
Operations. In addition, $0.6 million of non-cash charges relate
to early extinguishment of debt.
Interest expense, net of amounts capitalized, increased $6.0
million in 1997 primarily as a result of increased borrowings and
higher interest rates on the new debt. In addition, interest
expense includes amortization of $1.3 million relating to the
value assigned to warrants issued with the $75 million debt
offering completed in May 1997.
The net loss for 1996 includes a $3.85 million noncash
charge for the provision of impairment of domestic oil and gas
properties classified as held for sale. The loss in 1996 also
reflects the effect of a $2.4 million write-down and $0.7 million
loss on sale of the Company's investments.
Oil and gas revenues from properties held for sale for the
year ended December 31, 1997 were $236,000, compared to
approximately $1.1 million during 1996. Revenues will continue to
decline as the Company completes its announced program of selling
substantially all of its U.S. producing properties. Interest
income increased $2.2 million during the year ended December 31,
1997, compared with 1996. The primary reason for this increase
was the interest earned on the $75 million held in escrow from
the Note Offering.
As the Company continues to focus its resources on
exploration and development of the Block, future oil and gas
revenues will initially be directly related to the degree of
drilling success experienced. The Company does not anticipate
significant increases in its oil and gas production in the short-
term and expects to incur operating losses until such time as net
revenues from the China projects are realized.
General and administrative expenses increased $1.4 million
during 1997 as compared with 1996, as reflected in the following
table.
1997 1996
---- ----
(thousands)
Payroll, benefits and travel $ 1,554 $ 1,683
Non-cash compensation cost 853 --
Legal and professional 1,284 510
Public company and corporate expenses 574 539
Lafayette office expense 304 374
Corporate insurance 341 381
------ ------
$ 4,910 $ 3,487
====== ======
The increase in legal and professional fees of $774,000 were
principally related to fees of $214,000 on one lawsuit, an
increase of $287,000 for outside consulting and the remainder of
the increase for general and corporate legal and accounting
services.
1996 compared to 1995
---------------------
The Company reported a net loss for fiscal 1996 of $12.1
million before preferred dividends of $5.4 million, or a total of
$0.07 per share, compared to a net loss for fiscal 1995 of $87.8
million before preferred dividends of $4.8 million, or $0.38 per
share. The net loss for 1996 includes a $3.85 million noncash
charge for impairment of domestic oil and gas properties,
classified as assets held for sale. The loss in 1996 also
reflects a $2.4 million write-down and $0.7 million loss on the
sale of the Company's investments.
The net loss for 1995 includes a $75.3 million noncash
charge for the provision of impairment of domestic oil and gas
properties. The carrying amounts of the Company's properties in
Texas were written down by $16.5 million during 1995, in order to
comply with the ceiling limitation prescribed by the Commission.
This was principally due to downward revisions in estimated
reserves in the second quarter and reduced present values of
reserves attributable to delays in development drilling scheduled
in the third quarter. During the fourth quarter, to reflect the
expected results of its announced program to divest itself of its
U.S. oil and gas properties, the Company recorded an additional
$58.8 million noncash write-down, reducing the recorded value of
its domestic oil and gas properties to their estimated fair
market value. The loss in 1995 also reflects the effects of a
$4.5 million write-down of the Company's other assets and
investments.
Earnings per common share are based on the weighted average
number of shares of common and common equivalent shares
outstanding: 265,573,020 for 1996, compared to 240,707,015 for
1995. The increase for 1996 primarily related to the sale of
approximately 3.8 million shares of Common Stock in Regulation S
unit offerings in March and April 1996, approximately 2.8 million
units in a private placement concluded in September 1996,
approximately 1.5 million shares of Common Stock issued as
consideration for a consulting agreement, approximately 5.5
million shares of Common Stock issued in respect of warrants
exercised in November and December 1996 and approximately 12.8
million shares of Common Stock issued in payment of interest on
the Subordinated Debt, all as set forth in the Consolidated
Statements of Shareholders' Equity. See Notes 6 and 7.
Oil and gas revenues from properties held for sale in 1996
were $1.1 million as compared to $2.5 million in 1995, primarily
due to continued reduction in volume sold. The Company does not
anticipate material revenues until late 1998 at the earliest when
production in China may commence.
General and administrative expenses for 1996 were $3.5
million as compared to $4.6 million in 1995. General and
administrative costs are expected to remain relatively unchanged
during the upcoming year. Operating costs are expected to
decline due to the further disposition of domestic oil and gas
properties.
Interest expense decreased in 1996, due primarily to the
Company's principal payments on its institutional debt in the
first quarter of 1996.
Subsequent Events
- -----------------
Effective January 16, 1998, the Series F Preferred Stock was
mandatorily converted into an aggregate of 633,893 shares of
Common Stock. Due to the Series F Preferred Stock being redeemed
and the Series A and E Preferred Stock being converted to Amended
Series A Preferred Stock, the Company's Preferred Stock dividend
obligations in respect of such securities have been eliminated.
The effect of the recapitalization of the Series A and the Series
E Preferred Stock has resulted in an increase in the Company's
Preferred Stock dividend obligations of $3.7 million annually
which can now be paid in kind in shares of Amended Series A
Preferred Stock (valued at $85 per share). Aggregate liquidation
preference increased from $63.3 million in 1996 to $103 million
in 1997.
Effective December 31, 1997, the Company entered into an
interim settlement agreement with the holder of the Series B
Preferred Stock whereby the Company paid such holder $1 million
as a deposit in anticipation of the settlement of a lawsuit
commenced by such holder for a claimed aggregate redemption price
of such stock of approximately $5.0 million and accrued and
unpaid dividends to the redemption date. The final settlement
took place on March 3, 1998, and the lawsuit was dismissed with
prejudice on March 9, 1998. Pursuant to the settlement, the
holder of the Series B Preferred Stock sold the stock and
warrants and the buyers exchanged the Series B Preferred Stock
for Amended Series B Preferred Stock and warrants, returned the
old warrants to the Company for cancellation and received payment
of accrued and unpaid dividends on the Series B Preferred Stock
in shares of Amended Series B Preferred Stock. The $1 million
deposit was returned upon receipt of the proceeds from the sale
of the Series B Preferred Stock.
Year 2000 Compliance
- --------------------
The Company has conducted a review of its computer systems
to identify the systems that could be affected by the "Year 2000"
issue. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year and equipment with time-sensitive embedded
components. Any of the Company's programs that have time-
sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system
failure or miscalculations. Although no assurance can be given
because of the potential wide scale manifestations of this
problem which may affect the Company's business, XCL presently
believes that the Year 2000 problem will not pose significant
operational problems for its computer systems and that the Year
2000 problem will not have a material impact on its costs of
operations.
The Company also may be vulnerable to other companies' Year
2000 issues. The Company's current estimates of the impact of
the Year 2000 problem on its operations and financial results do
not include costs and time that may be incurred as a result of
any vendors' or customers' failure to become Year 2000 compliant
on a timely basis. The Company intends to initiate formal
communications with all of its significant vendors and customers
with respect to such persons' Year 2000 compliance programs and
status. However, there can be no assurance that such other
companies will achieve Year 2000 compliance or that any
conversions by such companies to become Year 2000 compliant will
be compatible with the Company's computer system. The inability
of the Company or any of its principal vendors or customers to
become Year 2000 compliant in a timely manner could have a
material adverse effect on the Company's financial condition or
results of operations.
SIGNIFICANT EVENTS AFFECTING THE COMPANY
SINCE MARCH 31, 1998
Since March 31, 1998, the following significant events
affecting the Company have occurred:
On April 7, 1998, the Board of Directors declared a dividend
on the Amended Series A Preferred Stock, payable in additional
shares of Amended Series A Preferred Stock valued at $85.00 per
share, at the semiannual dividend rate of $4.0375 per share.
Such dividend payment resulted in the issuance of an aggregate of
53,650 shares of Amended Series A Preferred Stock to holders of
record on April 15, 1998.
BUSINESS
The Company's principal business is the exploration for and
development and production of crude oil and natural gas. Building
on the success of its first such project in China, the joint
venture on the Block (see "Prospectus Summary -- The Company"),
the Company's strategy is to expand those operations and,
selectively, to enter into additional energy-related joint
ventures. The Company is confident that the undeveloped energy
resources of China are extensive and that China's energy needs
are growing at a high rate and will continue to expand in the
foreseeable future. The Chinese government, further, has recently
encouraged foreign participation in the development of its energy
resources, and has demonstrated a willingness to include
independent oil and gas exploration companies such as the Company
in additional energy-related joint ventures. On the basis of the
Company's excellent relationship with the Chinese energy-related
industry representatives, it believes that it can remain
competitive in that country. See "The Zhao Dong Block," below.
To expand its energy-related activities in China, on July
17, 1995 the Company signed a contract with CNPC United Lube Oil
Corporation to engage in the manufacturing, distribution, and
marketing of lubricating oil in China and in southeast Asian
markets. See "United/XCL Lube Oil Joint Venture," below. And on
December 14, 1995, the Company signed a Memorandum of
Understanding with the China National Administration of Coal
Geology ("CNACG"), pursuant to which the parties have begun
cooperative exploration and development of coalbed methane in two
areas of China. See "Coalbed Methane Project," below.
Corporate History; Address; Employees
- -------------------------------------
Before 1993, the Company operated primarily in the Gulf
Coast area of the United States. Formerly The Exploration Company
of Louisiana, Inc., XCL Ltd. was incorporated in Delaware in
1987. It is the successor to a Louisiana corporation of the same
name, incorporated in 1981. The Company's principal executive
offices are at 110 Rue Jean Lafitte, 2nd Floor, Lafayette,
Louisiana 70508. Its telephone number is (318) 237-0325.
As of December 31, 1997, the Company's employees totaled 23.
No employees are subject to any union contracts. The Company
believes it maintains good relations with its employees.
The Zhao Dong Block
- -------------------
Geology
-------
The Block extends from the shoreline of the Dagang oil field
complex on Bohai Bay to water depths of approximately 5 meters.
It encompasses approximately 197 square kilometers (roughly
50,000 gross acres). The Company believes that a portion of the
Block is a seaward extension of the Dagang oil field complex
which is one of China's largest. According to published
statistics, Dagang has produced over 700 million barrels of oil
and has an estimated ultimate recovery of more than one billion
barrels.
Tertiary formations constitute a major portion of the
Block's production, its geology being in many respects similar to
the U.S. Gulf Coast. Bohai Bay sediments are however non-marine
and oil prone, while the U.S. Gulf Coast sediments are open-
marine and gas and condensate prone. Seismic and subsurface data
appear to indicate a thick, structured sedimentary section in the
contract area. Proximity to producing fields and highly
productive test results from the wells which have been drilled
suggest excellent source rock.
Seismic
-------
Seismic data were acquired in and around the Block by
shallow water and transition zone seismic crews from 1986 to
1988. While the original processing of the data was fair in
reflection continuity, the Company's initial evaluation involved
reprocessing 721 km., resulting in dramatic improvement for both
structural and stratigraphic interpretation. This reprocessing,
plus 390 km. of new seismic data (outlined below), make available
a current total of 1,111 km. of 2D seismic data in and around the
Block.
From 1993 through 1995 the Company acquired an additional
390 km of 2D seismic data shot by Dagang Geophysical, a Chinese
firm, all of which assisted the Company in assessing the Block's
potential.
A 1997 3-D seismic program was designed to delineate
development well locations in the C-D Field and to better define
exploration prospects on the remainder of the Block. The program
covered approximately 100 square kilometers and cost
approximately $5.5 million; the Company's share was approximately
$2.75 million. A similar program (at a comparable cost) will be
undertaken in 1998 to cover most of the rest of the Block.
Drilling Results
----------------
Mapping of seismic events on shallow, medium, and deep
reflections delineated possibly productive lead areas. Subsequent
exploratory drilling resulted in three successful discoveries
along the Zhao Bei fault system. Appraisal tests have
structurally and stratigraphically delineated the aerial extent
of both the "C" and the "D" segments of the C-D Field.
Hydrocarbons have been found in the Lower Minghuazhen (Pliocene),
the Guantao (Miocene), and the Shahejie (Oligocene) formations.
Appraisal drilling is planned for 1998 to delineate the extent of
the 1997 C-4 discovery located northeast of the C-D Field. The C-
4 well is productive from the Shahejie Formation and,
additionally, from Jurassic and Permian Age sediments.
The Company's drilling programs, year by year, have been as
follows:
1994 Drilling
-------------
Zhao Dong C-1. The first of three Phase 1 exploratory
wells, C-1 was spudded in April 1994, and drilled to a depth
of 9,843 feet. Oil was tested in two Pliocene sands of the
Lower Minghuazhen Formation, from perforations shot between
4,278 and 4,462 feet, and yielded a combined test rate of
2,160 BOPD with no water. Total net pay for the zones tested
was 97 feet.
Zhao Dong C-2. Spudded and drilled in October 1994, the
C-2 appraisal well was drilled to a depth of 7,134 feet and
confirmed the C-1 discovery. Tested from four intervals,
between 4,267 and 4,481 feet, the combined rate of three of
the zones was 3,640 BOPD with no water. Total net pay for
the zones tested was 47 feet.
1995 Drilling
-------------
Zhao Dong C-2-2. Drilled directionally in April 1995 to
a measured depth of 5,625 feet (5,034 feet true vertical
depth), the C-2-2 appraisal was shaled out for prospective
sands in the Minghuazhen and then plugged back and
sidetracked as C-2-2A.
Zhao Dong C-2-2A. After plugging and abandoning the
bottom section of the C-2-2 well, the C-2-2A sidetrack well
was drilled structurally updip of the original wellbore to a
measured depth of 5,084 feet (4,956 true vertical depth).
Although Minghuazhen prospective sands were present and not
shaled out, the objective sands were water wet. Accordingly,
the well was plugged and abandoned.
Zhao Dong D-1. Designed to test the Ordovician
Carbonate section, the D-1 exploratory well reached a depth
of 8,784 feet in June 1995. Although no hydrocarbon
potential was found in the Ordovician Carbonates, oil was
found in the Lower Minghuazhen, proving this shallower
section to be productive upthrown to the Zhao Bei fault
system. Drill-stem testing, with perforations at 4,185 to
4,205 feet, confirmed hydrocarbons with an initial rate of
1,330 BOPD. The net pay for this zone was 20 feet.
Although the D-1 was designed primarily to test deeper
Paleozoic objectives, from 3,523 to 6,268 feet it yielded
another 15 sands ranging in age from Pliocene Minghuazhen to
Permian with hydrocarbon shows in mudlogs and/or sidewall
cores. One Permian sand tested water with a trace of 30
gravity oil; one Minghuazhen sand tested water with 2% oil.
Located on the eastern edge of the C-D structural
complex, the D-1 was not optimally placed to explore the
shallower hydrocarbon-containing sands. But the fact that it
tested 1,330 BOPD from one sand, tested water with smaller
amounts of oil from two other sands, and had shows in
numerous additional sands, suggests proximity to the limits
of a significant oil accumulation. Accordingly, the D-2
well, discussed under 1996 Drilling, below, was designed to
appraise the D-1 discovery at a much higher structural
position. See also the discussion, immediately below, of a
parallel relationship between and among the C-3, C-2, and C-
1 wells.
Zhao Dong C-3. Although scheduled to be drilled to
5,004 feet, this appraisal well, drilled in July 1995,
reached a total depth of 6,773 feet. Analysis of geological
information during drilling had shown that the C-3 was
structurally higher than both the C-1 and C-2, and so
drilling continued to test the Shahejie Formation until, at
approximately 6,595 feet, the Zhao Bei fault was crossed.
Eight different sands had drill-stem tests; seven were found
to be productive, as compared to only three and two for the
C-2 and C-1. (The C-1 and C-2 did however have oil shows in
several sands found to be productive in the C-3.) Cumulative
rate potential was 5,830 BOPD and 460 Mcfpd; one Shahejie
sand tested oil at 1,356 BOPD until water production began.
(Initial analysis indicates the water was coned due to
pressure draw-down during testing.) Total net pay for the
zones tested was 143 feet.
The C-3 thus indicates that Shahejie Formation sands
are oil productive with significant appraisal and
exploration potential, both in the C-D Field and over much
of the as yet undrilled portion of the Block. Initial
seismic stratigraphic analysis indicates additional
lacustrine fan systems could be present downdip.
1996 Drilling
-------------
Zhao Dong D-2. Spudded in November 1996, the D-2
appraisal well was designed to test the Minghuazhen
(Pliocene) and Guantao (Miocene) sands upthrown to the Zhao
Bei fault system, as well as the Shahejie (Oligocene)
Formation downthrown to a bifurcated fault of the same fault
system. It was drilled to a measured depth of 7,501 feet
(6,180 feet true vertical depth), on an upthrown fault
closure approximately 1.5 km. west of and structurally
higher than the D-1 discovery well.
Five intervals (six drill-stem tests) from perforations
at 3,285 to 5,445 feet (3,277 to 4,950 feet true vertical
depth) tested at a combined rate of 11,571 BOPD, confirming
the lateral productivity of several sands previously seen
productive and, in the Guantao Formation, establishing
production in several new sands. This well also demonstrated
much higher initial flow rates without the need for
artificial lift, one zone flowing 4,370 BOPD with 774 Mcfpd
of gas, and a second zone flowing 2,471 BOPD with 168 Mcfpd
of gas.
Sands seen productive in this well appear to be present
over the entire area, adding significantly to the overall
potential of the C-D Field as well as the rest of the Block.
Total net pay for the zones tested was 243 feet.
1997 Drilling
-------------
Zhao Dong F-1. Planned as an exploratory well to
fulfill Phase I drilling commitments, the F-1 was designed
to test an 1,800+ foot thick section of the Shahejie
Formation on a four-way dip structural closure. This
exploratory well was spudded in October 1996 and
directionally drilled, from a drill pad built at the
shoreline, to a measured depth of 14,501 feet (10,968 true
vertical depth). Severe mechanical problems prevented the
well from being fully evaluated, and two sidetrack attempts
were unsuccessful. Drilling operations under a turnkey
contract have been abandoned. A number of Shahejie sands
were encountered, with some apparent oil shows.
Zhao Dong D-3. The second appraisal well for the D-1
discovery, and located approximately 1 km. north of the D-1,
the D-3 was spudded in June 1997 and drilled to a depth of
5,740 feet. Although no drill-stem tests were performed
(since the data collected were sufficient to confirm the
productive nature of the reservoirs and since the rig was
needed to drill the C-4 Well), using wireline tools, oil was
recovered from several sands, most of which had tested oil
in the D-2 and D-1 wells, as well as from three new
productive sands for the "D" segment. Total net pay for the
productive zone was 89 feet. The D-3 Well thus solidified
structural interpretation and confirmed productive areas.
Zhao Dong C-4. An exploratory well designed to test Pre-
Tertiary and Shahejie Formations, the C-4 was spudded in
July 1997, on a separate structure approximately 2 kms.
northeast of the C-1, and was drilled to a depth of 8,993
feet. Eight zones tested at a combined rate of 15,349 BOPD,
6,107 Mcfpd of gas, and 14 barrels of condensate per day.
Total net pay for the zones tested was 209 feet.
The C-4 proved the presence and productivity of
multiple Oligocene Age Shahejie sands on the Block's
northern portion. The C-4 also found multiple high-quality
Cretaceous and Jurassic sands, not encountered in previous
drilling, present and productive, indicating that such sands
may be present and prospective elsewhere. Significantly, the
Shahejie, Cretaceous and Jurassic sands contained higher
gravity oil (28 to 38 degree API) and more gas, indicating
higher reservoir energy than previously encountered. All
zones tested exhibited natural flow.
Exploration Potential
- ---------------------
Reconnaissance seismic surveys on the Block have led the
Company's independent petroleum engineers to identify, in
addition to the C-D Field and the C-4 discovery, twenty-six
prospective areas with exploratory potential. Seismic data over
these prospective areas have been analyzed and the potential
reserves are being evaluated.
Future Drilling Plans
- ---------------------
The Company, Apache, and CNODC have approved a five-well
drilling program for 1998, which will include an appraisal well
to appraise the C-4 discovery and four exploratory wells, at
least two of which will be in the "C" and "D" segments.
The Contract
- ------------
The Company acquired the rights to the exploration,
development and production of the Block by executing a Production
Sharing Agreement with CNODC, a Chinese state enterprise,
effective May 1, 1993 (the "Contract"). The Contract includes
the following terms:
The Foreign Contractor (the Company and Apache as a group,
working through a participation agreement) must pay for all
exploration costs. If a commercial discovery is made and if
CNODC exercises its option to participate, development and
operating costs and allocable remainder oil and gas production
are shared up to 51% by CNODC and the remainder by the Foreign
Contractor.
The work under the Contract is divided into three
categories, Exploration, Development and Production.
Exploration, Development and Production operations can occur
concurrently on different areas of the Block. The Contract is
not to continue beyond 30 consecutive years. All exploration
work must be completed during the Exploration Period (which
expires April 30, 2000). The Production Period for each oil
field covered by the Contract is 15 years, starting with the date
of first production for that field.
Exploration Period
------------------
Work performed and expenses incurred during this period,
consisting of three phases totaling seven contract years and
beginning as of May 1, 1993, are the exclusive responsibility of
the Foreign Contractor. The Contract mandates certain minimal
requirements for drilling, seismic and expenditures during each
phase of the Exploration Period. The Foreign Contractor has
elected to enter the third exploration phase (expiring April 30,
2000). The Foreign Contractor is required to drill exploratory
wells prior to the expiration of the Exploration Period. The
minimum work requirements for seismic and the minimum
expenditures for the balance of the Contract have been met.
Development Period
------------------
The Development Period for any field discovered during the
Exploration Period commences on the date the requisite Chinese
governmental authority approves the development plan for an oil
and/or gas field. The C-D Field is now in the Development
Period.
Production Period
------------------
The Production Period for any oil and/or gas field covered
by the Contract (the "Contract Area") will be 15 consecutive
years (each of 12 months), commencing for each such field on the
date of commencement of commercial production (as determined
under the terms of the Contract). However, prior to the
Production Period, and during the Development Period, oil and/or
gas may be produced and sold during a long-term testing period.
Relinquishment
--------------
The Company expects that no relinquishment will be required
until Exploration Phase 3 has been concluded. After April 30,
2000, the portions of the Contract area, not including areas in
which development and/or production activities have been
undertaken, must be relinquished.
Termination of the Contract
---------------------------
The Contract may be terminated by the Foreign Contractor at
the end of each phase of the Exploration Period, without further
obligation. The parties have elected to go into the third phase
of the Exploration Period.
Post-Production Operating and Exploration Costs
-----------------------------------------------
After commercial production has begun, the operating costs
incurred in any given calendar year for an oil field shall be
recovered in kind from 60% of that year's oil production. After
recovery of operating costs, the 60% is applied to exploration
costs. Unrecovered operating costs shall be carried forward.
After recovery of operating and exploration costs for any
field, development costs shall be recovered by the Foreign
Contractor and CNODC from 60% of the remaining oil production,
plus deemed interest at 9%.
Natural gas shall be allocated according to the same general
principles, but in order to ensure reasonable benefit for the
Foreign Contractor the allocation percentages shall be adjusted
in the light of actual economic conditions.
Annual gross production ("AGP") of each oil and gas field
shall be allocated in kind in the following sequences and
percentages:
(1) 5 percent of AGP shall be allocated to pay Chinese
taxes.
(2) The Chinese government shall receive a sliding
scale royalty, determined on a field by field basis, calculated
as follows (as amended by the Ministry and State Taxation Bureau,
effective January 1, 1995):
METRIC TONS OF ANNUAL
CRUDE OIL PRODUCTION ROYALTY RATE
(One metric ton is roughly equivalent to seven
barrels of crude oil)
Up to and including 1,000,000 .................. Zero
1,000,000 to 1,500,000 ......................... 4%
1,500,000 to 2,000,000 ......................... 6%
2,000,000 to 3,000,000 ......................... 8%
3,000,000 to 4,000,000 ......................... 10%
Over 4,000,000.................................. 12.5%
(3) 60% of AGP shall be deemed "cost recovery oil" and
used for cost recovery, first of operating costs, and second for
exploration and development costs (including deemed interest).
Cost recovery oil shall not be reduced by any royalty due the
Chinese government.
(4) After recovery of operating, exploration, and
development costs (including deemed interest), the remainder of
AGP shall be considered "remainder oil," which shall then be
further divided into "allocable remainder oil" and "Chinese share
oil." Allocable remainder oil shall be calculated for each field,
based upon a sliding scale formula applied to each such field's
annual production, and shall be shared by the parties in
proportion to their respective interests under the Contract. All
oil remaining after the above allocations shall be designated
Chinese share oil and allocated to CNODC or other Chinese
government designee.
Administration of the Contract; Arbitration
- -------------------------------------------
The Contract is administered by the JMC, consisting of an
equal number of representatives designated by CNODC and by the
Foreign Contractor. Disputes must be resolved, first through
negotiation, and then arbitration (though CNODC may have the
right to seek resolution in Chinese courts). CNODC has not waived
sovereign immunity in any proceedings commenced in China.
If accepted by the parties, arbitration will be conducted by
the China International Economic and Trade Commission under its
provisional rules. If that is not accepted by the parties,
disputes may be arbitrated by a panel of three arbitrators, each
party to appoint one and the third appointed by the two thus
chosen or, failing such appointment, by the Arbitration Institute
of the Stockholm (Sweden) Chamber of Commerce. Arbitration shall
be conducted under the rules of the UN Commission on
International Trade Law of 1976 (subject however to such rules as
expressly provided in the Contract). Awards shall be final and
binding on the parties. The Contract is governed by Chinese law.
Apache Farmout
- --------------
In March 1994, by means of a participation agreement
("Participation Agreement"), the Company farmed out a one-third
interest in the Foreign Contractor's interest in the Block to
Apache in exchange for certain cash payments and Apache's
agreement to assume its pro rata share of expenditures and
liabilities with respect to exploration and development. As
required by the Participation Agreement, in June 1994, Apache and
the Company entered into a Joint Operating Agreement (the
"Operating Agreement'). To further reduce the Company's
exploration capital requirements and accelerate the development
of the Block, the Company and Apache entered into an agreement on
May 10, 1995 (the "Second Participation Agreement") pursuant to
which Apache increased its interest in the Contract to 50% of the
Foreign Contractor's interest and assumed operatorship,
obligating itself to pay 100% of the costs of drilling and
testing four exploratory wells (the "Carried Wells") on the
Block. The drilling and testing of the C-3, D-1, D-2 and F-1
wells will satisfy the obligations regarding the four Carried
Wells. All of these wells have been drilled and tested with the
exception of the F-1 Well, drilling operations on which have been
abandoned. The Company does not believe that such operations on
the F-1 Well to date satisfy Apache's obligations to deliver a
fourth Carried Well. The amounts advanced by Apache for the
Company's share of the Carried Wells are recoverable from a
portion of the Company's share of cost recovery revenues from the
Block. In addition, Apache obligated itself to pay the Company
16.667% of the value of the recoverable proved reserves
attributable to the portion of the Block delineated by the
drilling of the C-1 and C-2 and C-3 wells, the combined area
designated in the agreement as the "C Field," all as agreed to by
the Company and Apache in the Second Participation Agreement.
Payment for this purchase will be computed in accordance with
evaluation methodology as set forth in the Second Participation
Agreement and made to the Company from time to time as each
segment of the field is placed on production.
In consideration of the above described payments, Apache
assumed operatorship of the Block and increased its interest from
33.33% to 50% of the Foreign Contractor's share. All future
exploration expenditures in excess of the Carried Wells will be
borne 50% each by the Company and Apache. Under the Operating
Agreement, approval of a successor operator requires the vote of
not less than 55% of the Foreign Contractor's interest; if the
operator reduces its participating interest to less than 25%, a
committee established under the Operating Agreement comprised of
Apache and XCL (the "Operating Committee") shall vote on whether
a successor operator should be named. The appointment of a
successor or replacement operator requires government approval.
CNODC has the right to become operator of production operations
in certain circumstances described in the Contract.
All work under the Contract must be pursuant to a work
program and budget approved by the JMC. Each year, the Operating
Committee must submit a proposed work program and budget to the
JMC. Operating Committee approval of this work program and
budget requires the vote of not less than 55% of the Foreign
Contractor's interest. If 55% of the Foreign Contractor's
interest does not vote in favor of a proposed work program and
budget, the operator must submit the minimum work program and
budget necessary to meet the contractual obligations of the
Foreign Contractor under the Contract.
Under the Participation Agreement and the Operating
Agreement, Apache and the Company each has a right of first
refusal with respect to any sale or transfer of interest in the
Foreign Contractor's share of the Contract. In addition, under
the Participation Agreement Apache and the Company each has a
right of first refusal with respect to the sale of 50% or more of
outstanding voting capital stock of their respective subsidiaries
party to the Contract and the Participation Agreement. In
addition, each party has the option to purchase the other party's
interest in the Contract upon the occurrence of certain "option
events." Option events include the failure more than twice in one
year to pay sums due under the Operating Agreement, after
receiving written notice of default and failing to cure within
any applicable cure period provided by the Operating Agreement
(if nonpayment is the subject of dispute and arbitration under
the Operating Agreement, it does not constitute a "failure to
pay" until an arbitral decision is rendered against the
nonpayor), the inability of a party to pay its debts as they fall
due or a final unappealable order by a court of competent
jurisdiction liquidating the party or appointing a receiver to
take possession of all of the party's assets, the transfer of
more than 49% of the voting shares of the Apache subsidiary
holding Apache's interest in the Block or XCL-China, Ltd. ("XCL-
China"), the XCL subsidiary holding XCL's interest in the Block,
by their respective parents, or certain other defaults under the
Operating Agreement or the Contract. The consideration to be
paid on the exercise of the option to purchase is the fair market
value of the interest assigned. If the parties cannot agree on
the fair market value of the interest, it is to be determined by
arbitration. This option runs only to the benefit of Apache and
XCL-China and may not be transferred by either of them to any
third party.
United/XCL Lube Oil Joint Venture
- ---------------------------------
On July 17, 1995, the Company signed a contract with CNPC
United Lube Oil Corporation to form a joint venture company to
engage in the manufacturing, distribution and marketing of
lubricating oil in China and southeast Asian markets. The joint
venture has a 30-year life unless extended. The registered
capital of the joint venture is $4.9 million, with the Company to
contribute $2.4 million for its 49% interest, the last
installment of which was paid in late 1997. As its investment
for 51% of the stock, the Chinese contributed an existing
lubricating oil blending plant in Langfang, China, with a Chinese
government appraised value of $2.5 million. The registration of
the joint venture was approved by Chinese authorities and the
effective date of the joint venture is January 1, 1998. In a
letter of intent executed contemporaneously with the contract,
the parties have agreed to consider the feasibility of (i)
contributing to the joint venture a second existing plant in
southwest China and (ii) other projects, including constructing
oil terminals on the north and south coasts of China and engaging
in upgrading certain existing refineries within China.
The Langfang plant is located 50 km. southeast of Beijing.
The facility is built on a 10-acre site and has been evaluated on
the basis of U.S. Gulf Coast costs at a replacement value of $7.0
million, without taking into account the land value. The plant
currently produces and markets approximately 5,000 metric tons of
lube oil per year. Approximately $1.5 million of the Company's
investment has been allocated to the physical upgrading of the
facility, including the installation of automated filling lines
and packaging systems. Upon completion of the upgrading, the
plant's production capacity will be approximately 20,000 metric
tons per year, assuming one eight hour shift, five days per week.
Additional capacity will be available by adding shifts and
expanding the work week. Further capital improvements estimated
to cost $15 million could increase capacity to approximately
100,000 metric tons per year.
It is the Company's opinion that an essential element to the
success of the lube oil business in China will be the ability to
distribute the product. In order to assure adequate distribution
of the joint venture's products, the Company has entered into a
memorandum of understanding with the Coal Ministry in China which
is expected to be reduced to a formal distribution contract. The
Coal Ministry operates 125 major integrated distribution centers
throughout China and the Company expects to market the joint
venture's products through this system.
Coalbed Methane Project
- -----------------------
On March 31, 1995, the Company signed an agreement with the
CNACG, pursuant to which the parties will commence cooperation
for the exploration and development of coalbed methane in two
areas in China. During the study period contemplated by the
agreement, the Company will evaluate the properties, after which
the parties are expected to enter into a comprehensive agreement
as to the specifically designated areas, which may provide the
basis for coalbed methane development in other areas of China.
On December 14, 1995, the Company signed a Memo of Understanding
with CNACG to develop a contract for exploration, development and
utilization of coalbed methane in the two areas. The March 31,
1995 agreement expired by its terms on December 31, 1996;
however, the Company has been informally advised that CNACG will
extend the term of the agreement.
Domestic Properties
- -------------------
U.S. Exploration and Production Activities. The Company has
sold substantially all of its U.S. producing properties except
for an interest in the Berry R. Cox Field (the "Cox Field") in
South Texas and is seeking to sell or joint venture its interest.
The Company holds a 60% to 100% working interest in 1,265 acres
in this field on which there are currently four producing wells
(3.45 net wells). The Company's 1997, 1996 and 1995 annual net
sales of natural gas from the Company's interest in the Cox Field
was 72,200, 467,000 and 1,474,000 Mcf, respectively on a sale
basis. The December 1997, 1996 and 1995 gas price for the
Company's remaining domestic properties was $2.28, $1.84 and
$1.33 per Mcf, respectively. During 1996, litigation was
instituted against the Company in connection with the Cox Field
which has effectively impeded the Company's ability to consummate
a sale of such property. Upon resolution of the litigation, the
Company will continue its efforts to divest itself of these
properties. See "-- Litigation" below.
Lutcher Moore Tract. The Company holds, in partnership with
one of its subsidiaries, a fee interest in a 62,500 acre
undeveloped tract of Louisiana fee property located in Ascension,
St. James and St. John the Baptist Parishes, Louisiana (the
"Lutcher Moore Tract"). Expressions of interest to purchase the
property have been received from several parties and the Company
is presently evaluating such proposals with the intent to sell
the property. The Company is also evaluating the possibility of
developing the property into a source of wetland mitigation
credits. In connection with the acquisition of the Lutcher Moore
Tract, the Company's indirect ownership of such tract is subject
to a first mortgage, with a current principal balance of
approximately $2.0 million, and a number of sellers' notes, with
an aggregate current principal balance of approximately $0.5
million (collectively, the "Lutcher Moore Debt"). Recourse by the
holder of the first mortgage and the holders of the sellers'
notes is limited to the Lutcher Moore Tract, with neither the
Company nor its wholly-owned subsidiaries, XCL-Land Ltd. and The
Exploration Company of Louisiana, Inc., liable for the debt.
Oil and Gas Reserves
- --------------------
Based on the wells drilled to date, the Company's
independent engineering firm, H.J. Gruy and Associates, Inc.
("Gruy"), has projected gross proved undeveloped reserves for
the segments of the C-D Field drilled to date of 46.26 million
barrels of recoverable oil. CNODC has exercised its option to
pay 51% of all development costs and receive 51% of oil
production. Consequently, the Company's net interest in such
proved undeveloped reserves is estimated to be approximately
11.76 million barrels of oil with a PV-10 of $62.5 million as of
January 1, 1998. The Company believes that the C-D Field and the
remainder of the Block hold the potential for additional
significant increases in oil reserves. See "Risk Factors --
Reliance on Estimates of Proved Reserves and Future Net Revenues"
and Appendix A attached hereto.
Gruy has been preparing reserve estimates for the Company's
oil and gas reserves since August 1996. Gruy was selected by the
Company for this task based upon its reputation, experience and
expertise in this area. Gruy is an international petroleum
consulting firm with offices in Houston and Dallas, Texas. Their
staff includes petroleum engineers and geologic consultants.
Services they provide include reserve estimates, fair value
appraisals, geologic studies, expert witness testimony and
arbitration. In 1997 the Company paid Gruy approximately $68,400
in fees for reserve report valuations and other services. No
instructions were given and no limitations were imposed by the
Company on the scope of or methodology to be used in preparing
the reserve estimates.
Offices
- -------
On March 31, 1997, the Company sold its office building
located at 110 Rue Jean Lafitte, Lafayette, Louisiana for
$900,000. On the same day, the Company entered into a lease with
the purchaser for one floor (approximately 9,500 square feet) of
the two-story building for a term of 22 months with an option to
extend for an additional eight-month period, at a monthly rental
of $7,500 for the first 21 months and $6,039 for the last month
(which is offset against mortgage payments due from the new owner
of the building). The outstanding balance of the underlying
mortgage was repaid in full upon the sale of the building. In
March 1998, the Company entered into a lease for approximately
3,400 square feet of office space located at 5487 San Felipe,
Suite 2110 in Houston, Texas. The lease expires December 31,
2000 and has a monthly rental of $4,932.
Litigation
- ----------
During December 1993, the Company and two of its wholly-
owned subsidiaries, XCL-Texas, Inc. and XCL Acquisitions, Inc.,
were sued in separate lawsuits entitled Ralph Slaughter,
Secretary of the Department of Revenue and Taxation, State of
Louisiana versus The Exploration Company of Louisiana, Inc. (15th
Judicial District, Parish of Lafayette, Louisiana, Docket No. 93-
5449); Ralph Slaughter, Secretary of the Department of Revenue
and Taxation, State of Louisiana versus XCL-Texas, Incorporated
(15th Judicial District, Parish of Lafayette, Louisiana, Docket
No. 93-5450); and Ralph Slaughter, Secretary, Department of
Revenue and Taxation 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 for the 1987 through 1991 fiscal years
in an aggregate amount (including penalties and interest through
September 1, 1993) of approximately $2.2 million. Statutory
interest at the rate of 15% per annum on the principal will
continue to accrue from September 1, 1993 until paid. The
Louisiana Department of Revenue has also assessed additional
Louisiana State franchise tax against the Company and/or XCL
Acquisitions, Inc. for the tax years 1991 through 1996 and
additional income tax against XCL Acquisitions, Inc. for the tax
years 1991 and 1995 on the same basis as those set forth in the
lawsuits. The Company protested the assessments and small
adjustments were made by the Department of Revenue. The
additional income tax assessment for the 1991 and 1995 tax years
is $89,688 and the additional franchise tax assessment for the
tax years 1991 through 1996 totals $1.6 million plus statutory
interest of 15% per annum from the due date until paid and
penalties not to exceed 25% of the total tax due. The Company
believes that these assessments have been adequately provided for
in the consolidated financial statements. The Company has filed
answers to each of these suits and intends to defend them
vigorously. The Company intends to continue to protest the
assessments. The Company believes that it has meritorious
defenses and has instructed its counsel to contest these claims.
On July 26, 1996, three lawsuits were filed against XCL-
Texas, Inc., a wholly-owned subsidiary of the Company, entitled
Stroman Ranch Company Ltd., el al. v. XCL-Texas, Inc. (229th
Judicial District, Jim Hogg County, Texas, Cause No. 4550), Frank
Armstrong, et al. v. XCL-Texas, Inc. (229th Judicial District,
Jim Hogg County, Texas, Cause No. 4551), and Stroman Ranch
Company Ltd., et al. v. XCL-Texas, Inc. (229th Judicial District,
Jim Hogg County, Texas, Cause No. 4552). The lawsuits allege
various claims, including a claim that one of the oil and gas
leases in the Berry R. Cox Field should be terminated. The
Company believes the claims made in the lawsuits are without
merit and intends to vigorously defend itself. The lawsuits have
prevented the Company from selling its interest in the Cox Field.
In July 1997, China Investment and Development Corporation
("CIDC"), holders of the Company's Series B Preferred Stock sued
the Company and each of its directors in an action entitled China
Investment and Development Corporation vs. XCL Ltd.; Marsden W.
Miller, Jr.; John T. Chandler; David A. Melman; Fred Hofheinz;
Arthur W. Hummel, Jr.; Michael Palliser; and Francis J.
Reinhardt, Jr. (Court of Chancery of the State of Delaware in and
for New Castle County, Civil Action No. 15783-NC). The suit
alleged breach of (i) contract, (ii) corporate charter, (iii)
good faith and fair dealing and (iv) fiduciary duty with respect
to the alleged failure of the Company to redeem CIDC's Series B
Preferred shares for a claimed aggregate redemption price of
approximately $5.0 million. Effective December 31, 1997, the
Company and CIDC entered into an interim settlement agreement
pursuant to which the Company paid CIDC $1 million as a deposit
in anticipation of a final settlement and dismissal of the
lawsuit. On March 3, 1998, the final settlement took place and,
shortly thereafter, the deposit was returned to XCL. On March 9,
1998, the lawsuit was dismissed with prejudice.
Other than as disclosed above, as of the date hereof, there
are no material pending legal proceedings to which either the
Company or any of its subsidiaries is a party or to which any of
their properties are subject which would have a material adverse
effect on the business or properties of the Company, taken as a
whole.
MANAGEMENT
Officers of the Company and its wholly owned subsidiaries
serve at the pleasure of the Board of Directors and are appointed
annually at the meeting of the Board of Directors immediately
following the annual meeting of shareholders. The following
individuals were officers and directors of the Company and its
subsidiaries as of December 31, 1997:
<TABLE>
<CAPTION>
Officer Director
Name Position Age Since Since
---- -------- --- ----- -----
<S> <C> <C> <C> <C>
Marsden W. Miller, Jr. Chairman of the Board and Chief
Executive Officer of the Company (1) 56 1981 1981
John T. Chandler Vice Chairman of the Board of the
Company and Chairman and Chief
Executive Officer of XCL-China Ltd. (1)(4) 65 1982 1983
Danny M. Dobbs President and Chief Operating Officer of
the Company and President of XCL-China Ltd. (4) 52 1991 --
Benjamin B. Blanchet Executive Vice President and
Director of the Company (1) 45 1997 1997
Steven B.Toon Chief Financial Officer of the Company
49 1997 --
Richard K. Kennedy Vice President of Engineering of the
Company 44 1989 --
R. Carter Cline Vice President-Land of the Company
49 1990 --
Herbert F. Hamilton Executive Vice President Operations,
XCL-China Ltd.(4) 61 1995 --
John H. Haslam Treasurer of the Company 56 1996 --
Lisha C. Falk Secretary of the Company 36 1997 --
Fred Hofheinz Director of the Company, Attorney at
Law (2)(3) 59 -- 1991
Arthur W. Hummel, Jr. Director of the Company,
Independent Consultant (2)(3) 77 -- 1994
Sir Michael Palliser Director of the Company,
Independent Consultant (2)(3) 75 -- 1994
Francis J. Reinhardt, Jr. Director of the Company,
Partner in Carl H. Pforzheimer & Co.(2)(3) 68 -- 1992
R. Thomas Fetters, Jr.. Director of the Company,
Independent Consultant (2)(3) 58 -- 1997
</TABLE>
_______________
(1) Member of the Executive Committee. The Committee met
once during 1997 and, subject to certain statutory
limitations on its authority, has all of the powers of the
Board of Directors while the Board is not in session, except
the power to declare dividends, make and alter Bylaws, fill
vacancies on the Board or the Executive Committee, or change
the membership of the Executive Committee.
(2) Member of the Compensation Committee. The Committee met
once in 1997. It is charged with the responsibility of
administering and interpreting the Company's stock option
plans; it also recommends to
the Board the compensation of employee-directors, approves the
compensation of other executives and recommends policies
dealing with compensation and personnel engagements.
(3) Member of the Audit Committee. The Committee met once in
1997. It reviews with the independent auditors the general
scope of audit coverage. Such review includes consideration
of the Company's accounting practices, procedures and system
of internal accounting controls. The Committee also
recommends to the Board the appointment of the Company's
independent auditors, and at least annually the Committee
reviews the services performed and the fees charged by the
independent auditors engaged by the Company.
(4) XCL-China Ltd. is an International Business Company
incorporated under the laws of the British Virgin Islands,
wholly owned by the Company, which manages the Company's oil
and gas operations in China.
Under the Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws of the Company, the
Board Directors is divided into three classes of directors
serving staggered three-year terms, with one class to be elected
at each annual meeting of shareholders and to hold office until
the end of their term and until their successors have been
elected and qualified. The current Class I directors, whose
terms of office expire at the 2000 annual meeting of
shareholders, are Messrs. Arthur W. Hummel, Jr., Michael Palliser
and Benjamin B. Blanchet; the current Class II directors, whose
terms of office expire at the 1998 annual meeting of
shareholders, are Messrs. Marsden W. Miller, Jr., R. Thomas
Fetters, Jr. and Francis J. Reinhardt, Jr.; and the current Class
III directors, whose terms of office expire at the 1999 annual
meeting of shareholders, are Messrs. John T. Chandler and Fred
Hofheinz. On April 7, 1998, Mr. Peter F. Ross was appointed as a
Class II director.
The Board held five meetings in 1997. The average
attendance by directors at these meetings was 100%, and all
directors attended 100% of the Board and Committee meetings they
were scheduled to attend.
Under Delaware law and the Bylaws, incumbent directors have
the power to fill any vacancies on the Board of Directors,
however occurring, whether by an increase in the number of
directors, death, resignation, retirement, disqualification,
removal from office or otherwise. Any director elected by the
Board to fill a vacancy would hold office for the unexpired term
of the director whose place has been filled except that a
director elected to fill a newly-created directorship resulting
from an increase in the number of directors, whether elected by
the Board or shareholders, would hold office for the remainder of
the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until his
successor is elected and qualified. If the size of the Board is
increased, the additional directors would be apportioned among
the three classes to make all classes as nearly equal as
possible.
The holders of the Amended Series A Preferred Stock are
entitled to cast the same number of votes (voting together with
the Common Stock as a single class) as the number of shares of
Common Stock issuable upon conversion of the Amended Series A
Preferred Stock.
The holders of the Amended Series B Preferred Stock are
entitled to cast 50 votes per share (voting together with the
Common Stock as a single class).
There are no arrangements or understandings with any
directors pursuant to which they have been elected a director nor
are there any family relationships among any directors or
executive officers.
Biographical Information
- ------------------------
MARSDEN W. MILLER, JR., Chairman, has been Chief Executive
Officer and a director since the Company's incorporation in 1981.
He has engaged in the independent domestic and international oil
business since 1964 on an individual basis, as a stockholder and
officer in several companies and as a practicing attorney. In
addition to the U.S. and China, he has been involved in various
aspects of the oil business in Southeast Asia, Africa, Europe,
South America, several former Soviet Republics and Canada. Mr.
Miller graduated from Louisiana State University in 1964.
JOHN T. CHANDLER is Vice Chairman of the Board and Chairman
and Chief Executive Officer of XCL-China. He joined the Company
in June 1982, becoming a director in May 1983. From 1976 until
he joined the Company he was the Managing Partner of the Oil and
Gas Group of GSA Equity, Inc., New York and director of Executive
Monetary Management, Inc., the parent company of GSA Equity, Inc.
From 1972 to 1976, he was director and Vice President of
Exploration and Production of Westrans Petroleum, Inc. and a
director of a number of its subsidiaries. During 1971 and 1972,
he was a petroleum consultant and manager of the oil department
of Den norske Creditbank in Oslo, Norway. Mr. Chandler was Vice
President and Manager of the Petroleum Department of the Deposit
Guaranty National Bank in Jackson, Mississippi from 1969 to
August 1971 and, from 1967 to February 1969, was a petroleum
engineer first for First National City Bank (now known as
Citibank, N.A.) and then The Bank of New York. From March 1963 to
July 1967, he was employed by Ashland Oil and Refining Company as
a petroleum engineer. From 1959 to 1963, he held the same
position with United Producing Company, Inc., which was acquired
by Ashland Oil.
Mr. Chandler graduated from the Colorado School of Mines
with a Professional degree in petroleum engineering and is a
Registered Professional Engineer in the States of Colorado and
Texas, a member of the Society of Petroleum Evaluation Engineers
and a member of AIME.
DANNY M. DOBBS is the President and Chief Operating Officer
of the Company effective December 17, 1997. Mr. Dobbs
previously served as Executive Vice President and Chief Operating
Officer of the Company and prior to that as Vice President-
Exploration of XCL Exploration & Production, Inc., a wholly-owned
subsidiary of the Company, having joined the Company in 1985 as
Senior Exploration Geologist. From 1981 to 1985 Mr. Dobbs was a
consulting geologist. From 1976 to 1981, he held the position of
Exploration Geologist in the South Louisiana District for Edwin
L. Cox in Lafayette, Louisiana. He served in various geologic
positions with Texaco, Inc. from 1971 to 1976, his experience
encompassing management, structural and stratigraphic mapping,
coordination of seismic programs and budget evaluation and
preparation. Mr. Dobbs holds B.S. and M.S. degrees in geology
from the University of Alabama, Tuscaloosa, Alabama.
BENJAMIN B. BLANCHET is Executive Vice President and
director of the Company. Prior to joining the Company in August
1997, and since 1983, he was a partner in the law firm of Gordon,
Arata, McCollam & Duplantis, L.L.P. in its Lafayette, Louisiana
office. During that time, he practiced in the areas of
commercial litigation, corporate mergers and acquisitions, oil
and gas transactions, secured financings, securities, tax and
international law matters. Since 1985, he has provided
substantial legal services to the Company, and has been the
Company's lead attorney in China. During that period, Mr.
Blanchet's activities in the Company's China operations have
become more oriented to management responsibilities than legal
ones. He served on the Management Committee of Gordon, Arata,
McCollam & Duplantis, L.L.P. from 1991 to 1997 and as the
Managing Partner of the firm for four years from 1992 through
1995. He practiced law with the firm of Monroe & Lemann in New
Orleans from 1978 through 1983. He is a member of the Louisiana
Bar and admitted to practice before the United States Tax Court.
Mr. Blanchet holds a B.A. degree, with highest distinction, from
the University of Southwestern Louisiana and a J.D., cum laude,
from Harvard Law School.
STEVEN B. TOON has been Chief Financial Officer of the
Company since October 6, 1997. Prior to joining the Company, Mr.
Toon provided consulting services to the Company, beginning in
June 1997. Since 1995 he has engaged in private consulting/CPA
practice with various clients in the energy and services sectors
in Houston. During the last six months of 1994, he served as
Chief Financial Officer of Xavier Mines, Ltd. He was Chief
Financial Officer of Lend Lease Trucks, Inc. prior to the sale of
its assets to Ryder System Inc. in mid-1994. From 1977 until
1992, Mr. Toon served as Vice President Finance and Treasurer of
United Energy Resources, Inc. and United Gas Pipe Line Company.
From 1971 to 1977, he was a Vice President in Bank of America's
World Banking Division. Mr. Toon holds a B.B.A. degree from the
University of Houston, an M.B.A. degree from California State
University, Fullerton and is a certified public accountant.
RICHARD K. KENNEDY is Vice President of Engineering and
responsible for certain engineering aspects of the Company's oil
and gas operations. From 1987, until he joined the Company in
1989, he was an operations engineer for Wintershall Corporation.
From 1981 to 1986 he was with Borden Energy, originally as a
petroleum engineer and later as regional operations manager.
From 1979 to 1981, Mr. Kennedy was employed with Marathon Oil
Company as a reservoir engineer, then as a drilling engineer. He
was employed with Shell Oil Company as a petroleum engineer and
reservoir engineer from 1977 to 1979. Mr. Kennedy graduated from
Louisiana Tech University with a B.S. degree in petroleum
engineering. He is a registered professional engineer in the
State of Louisiana and a member of the Society of Petroleum
Engineers.
R. CARTER CLINE is Vice President-Land, having joined the
Company in October 1990. He has over 20 years of exploration and
management experience. From 1982, until joining the Company, he
was employed by Pacific Enterprises Oil Company (USA), successor
by merger to Sabine Corporation, as East Gulf Coast Regional Land
Manager in Houston, Texas. From 1979 to 1982, he served as Vice
President-Land for Dynamic Exploration, Inc. in Lafayette,
Louisiana. From 1974 to 1979, he served as Region Landman in
Dallas and Division Land Manager in Houston, Texas, for Sabine
Corporation, and from 1971 to 1974 was employed by Getty Oil
Company in Houston, Texas and New Orleans, Louisiana. Mr. Cline
holds a B.B.A. degree in Petroleum Land Management from the
University of Texas at Austin and is a Certified Petroleum
Landman.
HERBERT F. HAMILTON is Vice President Operations of XCL-
China, having joined the Company in 1995. Mr. Hamilton has more
than 30 years of experience in the fields of engineering,
construction, construction management and consulting on heavy
civil works, offshore platforms, submarine pipelines and
construction equipment in over 35 countries. From 1990 to 1993,
Mr. Hamilton served as Senior Project Manager for Earl and
Wright in Houston, Texas. From 1993 to 1994, he served as
President and a consultant to Planterra, Inc. in Houston, Texas
and from 1994 until joining the Company he was an independent
consultant. Mr. Hamilton is a Registered Professional Engineer
and holds a B.S. in Architectural Engineering from the
University of Texas at Austin.
JOHN H. HASLAM is Treasurer, having joined the Company in
1990. From 1988 until joining the Company, he was employed by
United Gas Pipeline as Credit Manager. From 1986 to 1988, he
served as Director of Internal Audit for TransAmerican Natural
Gas Corporation. From 1981 to 1986 he was the Audit Manager for
ENSTAR Corporation. He was with Getty Oil from 1963 until 1981,
as Audit Manager of Joint Venture Operations and various other
accounting positions. Mr. Haslam holds a B.B.A. degree in
Marketing from Baylor University.
LISHA FALK is Corporate Secretary, having joined the Company
in 1981. Since joining the Company Ms. Falk has served in various
administrative positions, most recently as Assistant Secretary.
R. THOMAS FETTERS, JR. is an independent oil and gas
consultant. He has over 25 years of exploration, production and
management experience, both domestic and foreign. From 1995 to
1997 Mr. Fetters was Senior Vice President of Exploration of
National Energy Group, Inc., Dallas, Texas, and from February
1990, until September 1995, he was Vice President of Exploration
of XCL Ltd., and President of XCL-China Ltd. During 1989, until
joining the Company, he served as Chairman and Chief Executive
Officer of Independent Energy Corporation. From 1984 to 1989, he
served as President and Chief Executive Officer of CNG Producing
Company in New Orleans, Louisiana, and from 1983 to 1984 as
General Manager of the Planning and Technology Division of
Consolidated Natural Gas Service Co. in Pittsburgh, Pennsylvania.
From 1966 to 1983, he served in various positions, from Geologist
to Exploration Manager, with several divisions of Exxon,
primarily in the Gulf Coast region of the U.S. and
internationally, in Malaysia and Australia. Mr. Fetters holds
B.S. and M.S. degrees in geology from the University of
Tennessee.
FRED HOFHEINZ is an attorney at law in Houston, Texas. From
1984 to 1987, he served as President of Energy Assets
International Corporation, a fund management company, now a
subsidiary of Torch Energy Advisors, serving as a consultant to
Torch Energy Advisors until 1989. Mr. Hofheinz also served as the
Mayor of Houston, Texas from 1974 to 1978. He, along with his
family, developed the Astrodome in Houston, and owned the Houston
Astros baseball team until 1974. He is founder and director of
United Kiev Resources, Inc., an oil and gas production company
operating in the Republic of the Ukraine in the name of its
wholly-owned subsidiary, Carpatsky Petroleum Company. Mr.
Hofheinz earned a Ph.D. degree in Economics from the University
of Texas and his law degree from the University of Houston. He
was appointed as a director by the Board at a meeting held March
21, 1991.
ARTHUR W. HUMMEL, JR., a director since April 1994, is the
former U.S. Ambassador to the People's Republic of China during
the period 1981 to 1985. Since his 1985 retirement from the
State Department, after 35 years of service, he has been active
in consulting with firms doing business in East Asia, and
participating in academic and scholarly conferences in the U.S.
and in the East Asia region. He is a member and trustee of many
academic, business, and philanthropic organizations involved in
international affairs.
Mr. Hummel was born in China. After education in the U.S.
he returned to China prior to Pearl Harbor. Interned by the
Japanese, he escaped and fought with Chinese guerrillas behind
the Japanese lines in north China until the end of the war.
He obtained an M.A. (Phi Beta Kappa) in Chinese studies from
the University of Chicago in 1949, and joined the State
Department in 1950. His early foreign assignments include Hong
Kong, Japan and Burma. He was Deputy Director of the Voice of
America in 1961-1963; Deputy Chief of Mission of the American
Embassy in Taiwan, 1965-1968; Ambassador to Burma, 1968-1970;
Ambassador to Ethiopia, 1975-1976; Ambassador to Pakistan, 1977-
1981; and Ambassador to the Peoples Republic of China, 1981-1985.
He was Assistant Secretary of State for East Asia 1976-1977. He
has received numerous professional awards from within and outside
the Government.
SIR MICHAEL PALLISER, a director since April 1994, was from
1984 to 1993 Chairman of Samuel Montagu & Co. Limited, the London
merchant bank which was owned by Midland Bank, of which he was
Deputy Chairman from 1987 to 1991, and which is now part of the
Hong Kong & Shanghai Banking Corporation. He was Vice Chairman
of Samuel Montagu from 1993 to 1996. He is a former Director of
BAT Industries, Bookers, Eagle Star, Shell and United Biscuits.
In 1947, he joined the British Diplomatic Service and served
in a variety of overseas and Foreign Office posts before becoming
head of the Planning Staff in 1964-1966, Private Secretary to the
Prime Minister, 1966-1969, Minister in the British Embassy in
Paris, 1969-1971, and the British Ambassador and Permanent
Representative to the European Communities in Brussels from 1971-
1975. He was, from 1975 until his retirement in 1982, Permanent
Under-Secretary of State in the Foreign and Commonwealth Office,
and Head of the Diplomatic Service. From April to July 1982, he
was a special adviser to the Prime Minister in the Cabinet Office
during the Falklands War. He was appointed a Member of the Privy
Council in 1983. Effective December 31, 1995, Mr. Palliser
resigned as President of the China-Britain Trade Group and a
director of the UK-Japan 2000 Group, and effective February 29,
1996, he resigned as Deputy Chairman of British Invisibles. Mr.
Palliser is a former member of the Trilateral Commission, a
director of the Royal National Theatre. He is currently Chairman
of the Major Projects Association, designed to assist in and for
the handling of major industrial projects. Mr. Palliser also
serves as Vice-Chairman of the Salzburg Seminar, a center for
intellectual exchange based in Middlebury, Vermont, with its
conference center in Salzburg, Austria.
Sir Michael Palliser was educated at Wellington College and
Merton College, Oxford. He saw wartime service in the British
Army with the Coldstream Guards.
FRANCIS J. REINHARDT, JR., is a partner in the New York
investment banking firm of Carl H. Pforzheimer & Co. Mr.
Reinhardt has been a partner in the firm for over 30 years and
has held various positions, specializing in independent oil and
gas securities, mergers and acquisitions, placements
participation and institutional sales since 1956. Mr. Reinhardt
holds a B.S. degree from Seton Hall University and received his
M.B.A. from New York University. Mr. Reinhardt is a member of
the New York Society of Security Analysts, a member of and has
previously served as president of the Oil Analysts Group of New
York, a member and past president of the National Association of
Petroleum Investment Analysts and a member of the Petroleum
Exploration Society of New York. Mr. Reinhardt also serves as a
director of Mallon Resources Corporation, a Nasdaq traded
petroleum and mining company, as well as several privately held
companies. Mr. Reinhardt was appointed as a director of the
Company at a Board meeting held December 11, 1992.
PETER F. ROSS, fifty-nine years old, was appointed Chairman
of Dawnay Day Capital Markets in March 1998. Dawnay Day & Co. is
a London based private investment banking firm. Mr. Ross retired
as Chairman of Henderson Crosthwaite Institutional Brokers on
December 31, 1996, after holding that position since 1987. Under
Mr. Ross' term as Chairman, Henderson Crosthwaite became one of
the leading firms in London in the area of oil and gas
placements. From 1977 to 1986 he was head of Henderson
Crosthwaite's institutional sales department, with special
responsibility for the oil and gas division, until its
acquisition by Guinness Mahon Bank in 1986.
Mr. Ross was commissioned into the British Army serving with
the 5th Royal Inniskilling Dragoon Guards, his last posting being
to Libya where he retired and set up an industrial services
business. Following the Islamic Revolution in 1971, he returned
to the United Kingdom and joined London stockbrokers Northcote &
Co. In 1974, he joined George Henderson & Co., becoming a
partner in 1975, upon the merger with Fenn and Crosthwaite. Mr.
Ross was appointed as a director of the Company at a meeting of
the Board held April 7, 1998.
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 1997, 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 respective office
throughout the entire fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
------------------------ ------------------- ----------------
(1) (2) (3)
Other Restricted
Name and Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compen- Awards SARs Payout Compen-
Position Year ($) ($) sation (4) (#) (#) ($) sation ($)
-------- ---- ------ ----- -------- -------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1997 150,000 - - 1,000,000 - - -
Chairman and - 110,000
Chief Executive Officer 1996 150,000 - - - - - -
1995 150,000 - - - - - -
John T. Chandler (4) 1997 150,000 - - 333,333 133,333 - -
Vice Chairman; Chairman 20,000 5,000
and Chief Executive 1996 150,000 - - - - - -
Officer of XCL-China, Ltd. 1995 150,000 - - - 8,000 - -
Danny M. Dobbs 1997 136,875 - - - 400,000 - -
President and Chief 25,000
Operating Officer 1996 135,000 - - - 6,466 - -
1995 116,250 - - - - - -
Richard K. Kennedy 1997 112,500 - - - 266,666 - -
Vice President 5,000
1996 75,000 - - - - - -
1995 75,000 - - - - - -
Herbert F. Hamilton 1997 144,000 - - - - - -
Executive Vice President 1996 144,000 - - - - - -
Operations, XCL-China 1995 98,800 - - - 13,333 - -
</TABLE>
_______________
(1) 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% of such individual's
salary and bonus.
(2) Represents grants of restricted stock awards under the
Long-Term Stock Incentive Plan as amended and restated in
1997 (adjusted as to Common Stock to give effect to the
Reverse Stock Split). The first line under 1997 reflects
restricted stock awards for shares of Common Stock and the
second line reflects restricted stock awards for shares of
Amended Series A Preferred Stock. See "Awards to
Management."
(3) Represents awards of stock options granted under the
Company's Long-Term Stock Incentive Plan as amended and
restated in 1997 (adjusted as to Common Stock to give effect
to the Reverse Stock Split). The first line under 1997
reflects non-qualified stock options for shares of Common
Stock and the second line reflects non-qualified stock
options for shares of Amended Series A Preferred Stock. See
"Awards to Management."
(4) XCL-China Ltd. is a wholly-owned subsidiary of the
Company which manages the Company's operations in China.
(5) Mr. Hamilton commenced employment with the Company on
April 24, 1995. As part of his employment package he was
awarded options to purchase 13,333 shares of Common Stock
(adjusted to give effect to the Reverse Stock Split).
Stock Options
- -------------
The Company currently maintains one stock option plan which
was adopted by shareholders in 1992 and was amended and restated
in 1997. The plan is administered by the Compensation Committee
and provides 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.
On June 2, 1992, shareholders approved the Long-Term Stock
Incentive Plan ("1992 LTSIP"). The 1992 LTSIP was adopted with
the view of conforming the Company's prior plans to certain
regulatory changes adopted by the Commission and affording
holders of previously granted options the opportunity to exchange
their options for equivalent options under the 1992 LTSIP. By
action of the Board of Directors, effective June 1, 1997, the
1992 LTSIP was amended and restated, and certain awards were
granted thereunder, all subject to approval by shareholders which
was secured at the Company's Special Meeting in Lieu of Annual
Meeting of Shareholders held on December 17, 1997.
1997 LTSIP Restatement
----------------------
Nature of Awards. The 1997 LTSIP Restatement makes
available to the Compensation Committee the power to grant
certain awards ("Awards") to acquire shares of the Company's
Preferred Stock as well as shares of Common Stock. In common
with the 1992 LTSIP, the 1997 LTSIP Restatement makes available
to the Compensation Committee a number of incentive devices in
addition to Incentive Stock Options ("ISOs") (which are not
available with respect to Preferred Stock) and Nonqualified Stock
Options ("NSOs"), including reload options ("ROs") (which are not
available with respect to Preferred Stock), restricted stock
awards ("RSAs"), and performance units ("PUs") or appreciation
options ("AOs") (which were not authorized under the 1992 LTSIP),
each of which is described below and in the 1997 LTSIP
Restatement. NSOs to acquire Preferred Stock, a new feature, may
include an accrued dividend feature. The Board believes that
these award alternatives will enable the Committee to tailor the
type of compensation to be granted to key personnel to meet both
the Company's and such employee's requirements in the most
efficient manner possible.
Number of Awards. For Common Stock Awards, the 1997
LTSIP Restatement authorizes an aggregate of 4 million shares (as
adjusted for the Reverse Stock Split) of Common Stock for
issuance pursuant to awards granted thereunder, including grants
to non-employee directors. For Preferred Stock Awards, the 1997
LTSIP Restatement authorizes an aggregate of 200,000 shares of
the Company's Amended Series A Preferred Stock, or any other
series of Preferred Stock of the Company as designated by the
Committee with respect to an Award.
Description of Awards. As set forth above, and like the
1992 LTSIP, the 1997 LTSIP Restatement authorizes the
Compensation Committee to grant NSOs, ISOs, 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, 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). AOs (i.e.,
awards in which payments are based upon appreciation in shares or
other criteria determined by the Compensation Committee) are a
new feature added to the 1992 LTSIP by the 1997 LTSIP
Restatement.
Outside Director Awards. The 1997 LTSIP Restatement also
authorizes the Board to grant Awards to non-employee directors
and to set the terms and conditions of such Awards, without the
restrictions previously set forth in the 1992 LTSIP which were
required by certain federal securities law rules since abolished.
Administration of Plan. In keeping with the provisions of
the 1992 LTSIP, the Compensation Committee will develop
administration guidelines from time to time which will define
specific eligibility criteria, the types of awards to be
employed, whether such awards relate to Common Stock or Preferred
Stock, and the value of such awards. Specific terms of each
Award will be provided in individual Award agreements granted
each Award recipient. Key employees and other individuals who in
the judgment of the Committee may provide a valuable contribution
to the success of the Company and its affiliates will be
eligible. The Committee may establish different general Award
eligibility criteria for Awards involving Preferred Stock which
may require a higher level of management responsibility and
authority.
Change in Control Provisions. The 1997 LTSIP Restatement
contains change-in-control provisions which provide that the
threshold for determining if a "change in control of XCL" has
occurred as a result of a person or entity acquiring Company
stock has been lowered from 30% to 20% (disregarding the
acquisition of such stock by certain shareholders of the
Company). The 1997 LTSIP Restatement retains the 1992 LTSIP's
provisions pursuant to which a "change in control of XCL" will be
deemed to occur as a result of certain contested Board of
Director elections. If a "change in control of XCL" occurs
pursuant to the provisions described above, ISOs and NSOs then
outstanding will become exercisable in full, the forfeiture
restrictions on any RSAs to the extent then applicable will lapse
and amounts payable with respect to PUs and AOs then outstanding
will become payable in full. Also, under certain Awards made
under the 1997 LTSIP Restatement (see discussion below) the
occurrence of a "change in control of XCL" could obligate the
Company with respect to making payments with respect to Awards in
cash rather than in kind, or in obligating the Company to
repurchase individuals' shares of Common Stock or Preferred Stock
received under certain 1997 LTSIP Restatement Awards. Under
certain circumstances which are unforeseen at this time, the
existence of the change in control protections for individuals
receiving Awards under the 1997 LTSIP Restatement and resulting
obligations to the Company may impede the consummation of a
change in control of the Company.
Option Exercise Price. Under the 1997 LTSIP Restatement,
the Compensation Committee shall determine 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 or
Preferred Stock traded on the relevant date, as reported on the
Exchange, or other national securities exchange, or an automated
quotation system, or pursuant to a good faith determination by
the Board of Directors, if not so traded in a public market.
The 1997 LTSIP Restatement does not extend the term of the
1992 LTSIP and, therefore, the 1997 LTSIP Restatement will
terminate (and no further awards thereunder will be granted
after) June 2, 2002. In view of the fact that there is no public
market for the Amended Series A Preferred Stock, the fair market
value of the Amended Series A Preferred Stock on November 10,
1997, determined in good faith by the Board of Directors based
upon the last bid price of the Amended Series A Preferred Stock
in the PORTAL Market, as reported to the Company by Jefferies,
was $80.00 per share.
Awards to Management
- --------------------
On June 5, 1997, the Board made certain Awards under the
1997 LTSIP Restatement. These Awards were approved by the
shareholders of the Company in connection with the approval of
the 1997 LTSIP Restatement voted on at the Special Meeting of
Shareholders.
Effective June 1, 1997, M. W. Miller, Jr. was granted an
Appreciation Option with respect to appreciation in the Company's
total market capitalization (as defined) from and after June 1,
1997. See "Appreciation Option for M.W. Miller, Jr." below for a
more detailed discussion of such grant.
The closing price of the Company's Common Stock on the AMEX
on a recent date is set forth on the cover page of this
Prospectus.
The following tables set forth, for those persons named in
the "Summary Compensation Table," information on stock options
granted during 1997 and all stock options outstanding as of
December 31, 1997, adjusted to reflect the Reverse Stock Split.
The closing price on the AMEX on June 2, 1997 for the Common
Stock was $0.21875 (which price is not adjusted to reflect the
Reverse Stock Split), and the fair market value of the Amended
Series A Preferred Stock, based upon last sales price information
in the Private Offering, Resales and Trading through Automated
Linkage ("PORTAL") Market of the National Association of
Securities Dealers, Inc. as supplied by Jefferies, was $85.00 on
June 2, 1997. Mr. Miller's Appreciation Option (described below)
is not included because of the indeterminate nature of the Award.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Granted to
Options/ Employees in Exercise or
SARs Fiscal Base Price Expiration
Name Granted (#) Year ($/Share) Date 0% ($) 5% ($) 10% ($)
---- ----------- ------------ ------------ ----------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
M.W. Miller, Jr. (1) 110,000 * 64.7 85.00 June 1, 2007 - 5,880,165 33,601,492
J.T. Chandler (2) 133,333 + 6.7 3.75 June 1, 2007 - 212,641 1,634,758
5,000 * 2.9 85.00 June 1, 2007 - 267,280 1,527,341
D.M. Dobbs (3) 400,000 + 20.0 3.75 June 1, 2007 - 637,924 4,904,287
25,000 * 14.7 85.00 June 1, 2007 - 1,336,401 7,636,703
R.K. Kennedy (4) 266,666 + 13.3 3.75 June 1, 2007 - 425,282 3,269,516
5,000 * 2.9 85.00 June 1, 2007 - 267,280 1,527,341
H.F. Hamilton - - - - - - -
</TABLE>
* Amended Series A Preferred Stock.
+ Common Stock.
_______________
(1) Effective June 1, 1997, M. W. Miller, Jr. was
granted an NSO to purchase 110,000 shares of Amended Series A
Preferred Stock for an option exercise price of $85.00 per share
(aggregate purchase price of $9,350,000). Such NSO is
exercisable as follows: as to 27,500 shares on June 1, 2000; as
to 66,000 shares on June 1, 2001, and as to 16,500 shares on June
1, 2002. Mr. Miller's NSO will expire on June 1, 2007 or, if
earlier, the date his employment is terminated by the Company for
cause or the date he voluntarily terminates his employment
without good reason.
(2) Effective June 1, 1997, John T. Chandler was granted
an NSO to purchase 133,333 shares of Common Stock (adjusted for
the Reverse Stock Split) for an option exercise price (adjusted
for the Reverse Stock Split) of $3.75 per share (aggregate
purchase price of approximately $500,000) and an NSO to purchase
5,000 shares of Amended Series A Preferred Stock for an option
exercise price of $85.00 per share (aggregate purchase price of
$425,000). Such Common Stock NSO is exercisable as follows: as
to 44,445 shares on June 1, 1999; as to 44,444 shares on June 1,
2000, and as to 44,444 shares on June 1, 2001. Such Amended
Series A Preferred Stock NSO is exercisable as follows: as to
1,250 shares on June 1, 2000; as to 1,750 shares on June 1, 2001;
and as to 2,000 shares on June 1, 2002. Mr. Chandler's Common
Stock NSO and his Amended Series A Preferred Stock NSO will each
expire on June 1, 2007 or, if earlier, the date his employment is
terminated by the Company for cause or the date he voluntarily
terminates his employment without good reason.
(3) Effective June 1, 1997, Danny M. Dobbs was granted
an NSO to purchase 400,000 shares of Common Stock (adjusted for
the Reverse Stock Split) for an option exercise price (adjusted
for the Reverse Stock Split) of $3.75 per share (aggregate
purchase price of $1,500,000) and an NSO to purchase 25,000
shares of Amended Series A Preferred Stock for an option exercise
price of $85.00 per share (aggregate purchase price of
$2,125,000). Such Common Stock NSO is exercisable as follows:
as to 133,334 shares on June 1, 1999; as to 133,333 shares on
June 1, 2000; and as to 133,333 shares on June 1, 2001. Such
Amended Series A Preferred Stock NSO is exercisable as follows:
as to 6,250 shares on June 1, 2000; as to 8,750 shares on June 1,
2001; and as to 10,000 shares on June 1, 2002. Mr. Dobbs' Common
Stock NSO and his Amended Series A Preferred Stock NSO will each
expire on June 1, 2007 or, if earlier, the date his employment is
terminated by the Company for cause or the date he voluntarily
terminates his employment without good reason.
(4) Effective June 1, 1997, Mr. Richard Kennedy was
granted an NSO to purchase 266,666 shares of Common Stock
(adjusted for the Reverse Stock Split) at an exercise price
(adjusted for the Reverse Stock Split) of $3.75 per share
(aggregate purchase price of approximately $1,000,000), and an
NSO to purchase 5,000 shares of Amended Series A Preferred Stock
at an exercise price of $85.00 per share (aggregate purchase
price of $425,000). Such Common Stock NSO is exercisable as
follows: as to 88,890 shares on June 1, 1999; as to 88,888
shares on June 1, 2000; and as to 88,888 shares on June 1, 2001.
Mr. Kennedy's Common Stock NSO will expire on June 1, 2007 or, if
earlier, the date his employment is terminated by the Company for
cause or the date he voluntarily terminates his employment
without good reason. Such Amended Series A Preferred Stock NSO
is exercisable as follows: as to 1,250 shares on June 1, 2000;
as to 1,750 shares on June 1, 2001; and as to 3,000 shares on
June 1, 2002. Mr. Kennedy's Amended Series A Preferred Stock NSO
will expire on August 1, 2007 or, if earlier, the date his
employment is terminated by the Company for cause or the date he
voluntarily terminates his employment without good reason.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised in-the-Money
on Value Options/SARs at Options/SARs at
Exercise Realized Fiscal Year-End (#) Fiscal Year-End ($)(3)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. - - 334,994 (1) - - -
- - - (2) 110,000 (2) - -
160,000 (3) - - -
John T. Chandler - - 75,330 (1) 133,333 (1) - 558,332
- - - (2) 5,000 (2) - -
74,999 (3) - - -
Richard K. Kennedy - - 16,629 (1) 266,666 (1) - 1,116,664
- - - (2) 5,000 (2) - -
Danny M. Dobbs - - 22,653 (1) 402,155 (1) - 1,675,000
- - - (2) 25,000 (2) - -
38,799 (3) - - -
Herbert F. Hamilton - - 13,332 (1) - - -
</TABLE>
______________
(1) Represents options to purchase shares of Common Stock
exercisable under the Company's stock option plans at
December 31, 1997 (as adjusted to reflect the Reverse Stock
Split).
(2) Represents options to purchase shares of Amended Series A
Preferred Stock exercisable under the Company's 1997 LTSIP
Restatement at December 31, 1997.
(3) 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 was 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 agreement (based upon the product of
his highest monthly base salary and the number of months
remaining under his contract), at an exercise price of
$18.75 per share, and (b) for each dollar of salary
reduction for the 15-month period commencing January 1, 1993
through March 31, 1994, as based on the same formula and at
the same exercise price used in the granting of warrants
upon surrender of employment agreements. See "Employment
Agreements; Termination of Employment and Change-in-Control
Arrangements" below.
(4) At December 31, 1997, the Company's Common Stock price
was lower than the option and/or warrant exercise prices (as
adjusted to reflect the Reverse Stock Split) with the
exception of options granted effective June 1, 1997.
(5) At December 31, 1997, the Company's Amended Series A
Preferred Stock price was equal to the option exercise
price.
These options were all awarded under the Company's stock
option plans or the exchange of stock purchase warrants for the
surrender of employment agreements, all of which are described
above.
Appreciation Option for M.W. Miller, Jr.
----------------------------------------
Pursuant to the 1997 LTSIP Restatement, the Board approved
an Appreciation Option for M. W. Miller, Jr., which was approved
by shareholders at the December 17, 1997 Special Meeting of the
Shareholders. The Board determined that the Appreciation Option
to M. W. Miller, Jr. was in the best interests of the Company and
its shareholders, and is required in order to retain the services
of Mr. Miller, who has been instrumental in developing the
Company's China activities and in successfully concluding the
Company's Offerings. The Appreciation Option would also provide
Mr. Miller with additional incentive to increase the value of the
Company based upon its market capitalization, thereby directly
benefiting the shareholders of the Company by increasing the
value of their investments in the Company.
Long-Term Incentive Plans
Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans
----------------------------------
(a) (b) (c) (d) (e) (f)
Performance or
Number of Other Period
Shares, Units Until Maturation Threshold Target Maximum
Name or Other Rights or Payout ($ or #) ($ or #) ($ or #)
---- --------------- ---------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. (1) (1) (1) (1) (1)
</TABLE>
____________
(1) The Appreciation Option Agreement provides Mr. Miller
with the right, upon his payment of the Exercise Price (as
defined below), to additional compensation (payable in cash or in
shares of Common Stock or Preferred Stock or a combination
thereof, as elected by the Company) based upon 5% of the
difference between the market capitalization of the Company as of
June 1, 1997 and the market capitalization of the Company as of
the date that Mr. Miller exercises the Appreciation Option. For
purposes of the Appreciation Option, the Company's market
capitalization is the total fair market value of the Company's
outstanding shares of Common Stock, Preferred Stock and
outstanding options and warrants. In general, fair market value
is determined based on the trading price of marketable securities
and by the Board of Directors as to the fair market value for
securities for which there is no ready market. Fair market value
as of the date of exercise of the Option is based on the average
fair market value of the 30-day period immediately preceding the
date of the Appreciation Option exercise. On June 1, 1997 and
December 31, 1997, the aggregate market capitalization of the
Company was $161,547,223 and $177,572,416, respectively. Upon
exercise of his Option, in the event the Company elects to settle
the Option with shares of Stock, Mr. Miller must pay the Company
twenty percent (20%) of the amount he is entitled to receive upon
exercise of the Appreciation Option (before any reduction as
hereinafter set forth), or any increment thereof, up to an
aggregate maximum of $5 million (the "Exercise Price") in cash.
In the event the Company elects to settle the Option in cash, the
amount of cash Mr. Miller will receive will be reduced by the
amount of the Exercise Price. Because Mr. Miller's Appreciation
Option contemplates compensation determined with reference to
increases in the Company's market capitalization without
restriction, there is no effective limit on the amount of
compensation which may become payable thereunder. Mr. Miller may
exercise his Appreciation Option as of any June 1 or December 1
commencing June 1, 2002, upon 45 days written notice, in whole or
in 10% increments. In the event that Mr. Miller exercises his
Appreciation Option for less than the total amount available
thereunder, the percentage increment as to which it is exercised
will cease to be available to create additional compensation
opportunity for Mr. Miller based upon subsequent appreciation in
the Company's market capitalization. Mr. Miller's Appreciation
Option expires on June 1, 2007 and will remain exercisable at any
time prior to such expiration notwithstanding his termination of
employment with the Company unless such employment is terminated
by the Company for "cause" or is terminated by Mr. Miller without
"good reason." In keeping with the provisions of the 1997 LTSIP
Restatement discussed in "1997 LTSIP Restatement - Change of
Control Provisions," in the event of a "change in control of XCL"
the Appreciation Option will become immediately exercisable and
the Company will be obligated to pay Mr. Miller, in cash, upon
any exercise of his Appreciation Option, at least 40% of the net
amount payable. This obligation may impede the consummation of a
change of control of the Company.
Certain Federal Income Tax Effects
- ----------------------------------
The following is a general summary of the principal federal
income tax effects to the Company under current law of the
various awards which may be granted under the 1997 LTSIP
Restatement. These descriptions do not purport to cover all
potential tax consequences.
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), limits deductibility of certain
compensation for the Company's Chief Executive Officer and the
additional four executive officers of the Company who are highest
paid and employed at year end to $1 million per year unless
certain conditions are met which result in compensation being
characterized as "performance-based." Awards under the Plan will
not satisfy the conditions necessary to cause the compensation
earned under them to qualify as "performance-based" compensation,
which is not subject to the deductibility limit of Section 162(m)
of the Code. It is the position of the Board of Directors that
the approach necessary for the design of incentive compensation
that will satisfy the criteria under Section 162(m) of the Code
would compromise the best interests of the Company and its
shareholders.
Certain provisions in the 1997 LTSIP Restatement may afford
the recipient of an Award under the 1997 LTSIP Restatement with
special protections or payments which are contingent upon a
change in the ownership or effective control of the Company or in
the ownership of a substantial portion of the Company's assets.
To the extent that they are triggered by the occurrence of any
such event, these special protections or payments may constitute
"parachute payments" which, when aggregated with other "parachute
payments" received by the recipient, could result in the
recipient receiving "excess parachute payments." The Company
would not be allowed a deduction for any such "excess parachute
payments" and the recipient of such "excess parachute payments"
would be subject to a nondeductible 20% excise tax upon such
payments in addition to income tax otherwise owed with respect to
such payments.
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. The Company
has obtained a favorable determination from the Internal Revenue
Service regarding the tax-favored status of this plan. Employees
can contribute up to 10% of their compensation. The Company, at
its discretion and subject to certain limitations, may contribute
up to 75% of the contributions of each participant. The Company
did not make any contributions to the 401(k) Plan in 1997.
Compensation of Directors and Other Arrangements
- ------------------------------------------------
The Company reimburses its directors for 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 Messrs. Hummel and Palliser, upon their becoming
directors. Each of the agreements is terminable by either 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 those directors receives 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 1992 LTSIP, Messrs. Hummel, Palliser, Reinhardt and
Hofheinz, each a non-employee director, were each granted stock
options for 6,666 shares of Common Stock exercisable at prices
ranging from $18.75 to $31.59 per share (adjusted for the Reverse
Stock Split).
In June 1997, the Company entered into a consulting
agreement with Mr. Fetters, a director of the Company. The
agreement is for a one-year term ending July 31, 1998, to
continue thereafter on a month to month basis. The agreement may
be terminated by either party on thirty days written notice.
Pursuant to the terms of the agreement, Mr. Fetters is to consult
with the Company on all aspects of the Company's exploration,
development and production projects. For his services Mr. Fetters
is to receive $30,000 per annum, which is in addition to the
compensation he receives as a director for attending meetings of
the Board. In addition to the above compensation, Mr. Fetters is
entitled to receive a finder's fee on certain specifically
identified projects.
Effective June 1, 1997, Messrs. Hummel, Palliser, Reinhardt,
Hofheinz and Fetters were each granted nonqualified stock options
to purchase 66,666 shares of Common Stock (adjusted for the
Reverse Stock Split) exercisable at $3.75 (adjusted for the
Reverse Stock Split) per share under the 1997 LTSIP Restatement.
See "Stock Options - 1997 LTSIP Restatement - Awards to
Management" herein.
Benjamin B. Blanchet, in his capacity as Executive Vice
President, is entitled to a salary of $80,000 per year for up to
80 hours per month of services.
Effective August 1, 1997, the Company entered into a
Services Agreement with Mr. Blanchet. The Agreement is
terminable by either party at any time without cause. Under the
Agreement, Mr. Blanchet is engaged to act as counsel to the
Company to perform from time to time such services as the Company
may request of him in that capacity. In general, compensation
for services under the Services Agreement will be at the rate of
$175 per hour for up to 80 hours per month. Also, under the
Services Agreement, the Company has agreed to provide Mr.
Blanchet with office space, supplies, secretarial assistance, a
library allowance, professional liability insurance,
reimbursement for continuing legal education expenses and bar
dues. Under the Services Agreement, Mr. Blanchet may, except as
prohibited by law or the Louisiana Rules of Professional
Responsibility, represent other clients and engage in business
for his own account.
In connection with his employment by the Company, Mr.
Blanchet received from the Company a $100,000 loan to replace
benefits that he forfeited when he withdrew as a partner of
Gordon, Arata, McCollam & Duplantis, L.L.P. to become Executive
Vice President of the Company. The loan is to be repaid over
eight years from annual bonus payments equal to interest, at the
rate of 6.5% per annum, plus one-eighth of the original principal
balance to be paid by the Company to Mr. Blanchet each year and
shall be forgiven in its entirety if (i) the Company shall fail
to pay timely any such bonus payment, shall breach the Services
Agreement or shall terminate his employment without "cause" or
(ii) Mr. Blanchet terminates his employment with "good reason,"
in either case as such terms are defined in the note evidencing
such loan.
Effective August 1, 1997, Benjamin B. Blanchet was granted
an NSO to purchase 400,000 shares of Common Stock for an option
exercise price of $3.75 per share (aggregate purchase price of
$1,500,000.00). Such Common Stock NSO is exercisable as to
133,334 shares on August 1, 1999; as to 133,333 shares on August
1, 2000 and as to 133,333 shares on August 1, 2001. On that same
date Mr. Blanchet was granted an NSO to purchase 25,000 shares of
Amended Series A Preferred Stock for an option exercise price of
$85.00 per share (aggregate purchase price of $2,125,000). Such
Amended Series A Preferred Stock NSO is exercisable as to 6,250
shares on August 1, 2000; as to 8,750 shares on August 1, 2001
and as to 10,000 shares on August 1, 2002. Mr. Blanchet's NSOs
will expire on August 1, 2007 or, if earlier, the date his
employment is terminated by the Company for cause or the date he
voluntarily terminates his employment without good reason.
During 1997 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; Termination of Employment and Change-in-
Control Arrangements
- ---------------------------------------------------------------
Effective April 1, 1994, Messrs. M.W. Miller, Jr., J.T.
Chandler, D.M. Dobbs, and R.C. Cline, 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 $18.75 per share
(adjusted for the Reverse Stock Split), 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 agreement (based upon the
product of his highest monthly base salary and the number of
months remaining under his agreement). Accordingly, Mr. Miller
received warrants to purchase 125,000 shares; Mr. Chandler,
68,333 shares; Mr. Dobbs, 38,333 shares; and Mr. Cline, 16,666
shares, all adjusted for the Reverse Stock Split.
Effective January 1, 1989, the Company adopted a policy
addressing severance upon separation from the Company. Under
this policy benefits due upon a change-in-control as therein
defined range from three months salary for employees with less
than one year of service to 24 months salary for employees with
more than 10 years of service.
Report on Repricing of Options/SARs
- -----------------------------------
During the fiscal year ended December 31, 1997, there were
no repricings of stock options awarded to any of the named
executive officers.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
For the year ended December 31, 1997, the following
nonexecutive directors of the Company, served as members of the
Compensation Committee of the Board of Directors: Messrs. M.
Palliser, A.W. Hummel, Jr., F. Hofheinz (Chairman) and F.J.
Reinhardt, Jr. 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
managers, and administers the Stock Option Plans and Long Term
Stock Incentive Plan. The Committee currently consists of four
independent, nonemployee directors: Messrs. F. Hofheinz, who
serves as Chairman, M. Palliser, 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 contributions 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 set forth below, 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 1997, the
Company did not retain the services of a compensation consulting
firm.
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.
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 "performance-based
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 nonmaterial loss of a portion of the deductions
associated with that compensation.
In recognition of the efforts and sacrifices of management
that had enabled the Company in mid-1997 to be on track to meet
its 1997 goals, the need to retain existing management and the
need to attract qualified and competent personnel, in June 1997,
the Board of Directors reassessed the need for adjusting
management's compensation to provide for additional incentives to
management. As a result of this reassessment, the Board of
Directors approved amendments to and a restatement of the
Company's 1992 LTSIP subject to shareholders approval, which was
obtained on December 17, 1997. These amendments generally made
available to the Committee the authority to grant Awards to
executives employed by the Company entitling such executives to
acquire shares of the Company's Preferred Stock and Common Stock.
They also made available to the Committee the authority to grant
appreciation awards. As described in greater detail in "Awards
to Management," the Board of Directors made, subject to the
approval of the shareholders of the Company, which was obtained
on December 17, 1997, certain Awards under the 1997 LTSIP
Restatement effective as of June 1, 1997 (except for awards to
the CFO and an Executive Vice President which were effective
October 6 and August 1, 1997, respectively). The Committee
believes that the 1997 LTSIP Restatement and the Awards granted
thereunder effectively encourage retention and continuity of
management, appropriately reward management for its past
performance and align the interests of management with those of
the Company's shareholders by providing management with the
opportunity to share in the creation of the Company's value.
On December 17, 1997, the Committee reviewed the Company's
1997 financial results and 1997 nonfinancial goals and determined
that, in light of (i) the Company's continued successful drilling
results in the Zhao Dong Block in the Bohai Bay in China, (ii)
the fact that top officials in China's oil industry have
indicated that the Company will be offered additional exploration
and development rights in China and (iii) the Company's
successful placement in May 1997 of $100 million of Preferred
Stock and Notes, the proceeds of which allowed the Company to
commence achieving its objectives in China, the Company's
financial and operating goals for 1997 had been met and exceeded.
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.
It determined that the CEO had been successful in disposing of
assets and raising capital throughout the year. Taking into
consideration the performance of the CEO, as well as the
Company's current cash position and near term requirements, the
adoption of the 1997 LTSIP Restatement and the NSO and
Appreciation Option awarded to the CEO under the 1997 LTSIP
Restatement, the Committee decided that the 1997 awards should
serve in lieu of a cash salary increase or bonus to the CEO for
the present time.
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.
December 17, 1997 COMPENSATION COMMITTEE
Fred Hofheinz, Chairman
Arthur W. Hummel
Michael Palliser
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 AMEX Market Value Index for
the years 1993 through 1997, 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, namely: Alta Energy
Corporation; Amerac Energy Corporation (formerly Wolverine
Exploration Company); Bellwether Exploration Company; Brock
Exploration Corporation; Tom Brown, Inc.; Caspen Oil, Inc.;
Chemfirst Inc. (formerly First Mississippi Corporation); Cobb
Resources Corporation; Coda Energy, Inc.; Comstock Resources,
Inc.; Crystal Oil Company; DeKalb Energy Company; Edisto
Resources Company; Energen Corporation; Forest Oil Corporation;
Geodyne Resources, Inc.; Global Natural Resources, Inc.; Goodrich
Petroleum Corporation (formerly Patrick Petroleum Company);
Hallador Pete Company; Hondo Oil & Gas Company; Kelley Oil & Gas
Partners; Louis Dreyfus Natural Gas (formerly American
Exploration Company); Magellan Petroleum Corporation; Maynard Oil
Company; Monterey Resources, Inc. (formerly McFarland Energy,
Inc.); MSR Exploration Limited; Numac Energy, Inc.; Pacific
Enterprises; Penn Virginia Corporation; Plains Resources, Inc.;
Presidio Oil; Wainoco Oil Corporation; Wichita River Oil; and
Wiser Oil 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, 1992 and that all dividends were reinvested.
[SHAREHOLDER RETURN PERFORMANCE GRAPH]
1993 1994 1995 1996 1997
Return Return Return Return Return
------ ------ ------ ------ ------
XCL 49.96 72.18 27.73 16.62 24.82
Peer Group 121.87 121.48 153.45 183.12 217.52
AMEX 119.52 108.63 137.32 146.10 171.48
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
The following table sets forth as of March 31, 1998, the
individuals or entities known to the Company to own more than
5 percent of the Company's outstanding shares of voting
securities. As of that date there were 22,926,333 shares of
Common Stock, excluding 69,471 shares held as treasury stock;
1,129,453 shares of Amended Series A Preferred Stock; and
47,085 shares of Amended Series B Preferred Stock issued and
outstanding. Except as otherwise indicated, all shares are
owned both of record and beneficially.
<TABLE>
<CAPTION>
Amended Series A Amended Series B
Common Stock (1) Preferred Stock(2) Preferred Stock (3)
--------------------- --------------------- ----------------------
Name and Address Number of Percent Number of Percent Number of Percent
of Beneficial Owner Shares of Class Shares of Class Shares of Class
- ------------------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cumberland Associates
1114 Avenue of the Americas
New York, New York 10036 2,900,228 (4) 11.28 214,909 19.03 -- --
KAIM Non-Traditional, L.P.
1800 Avenue of the Stars,
2nd Floor
Los Angeles, California 90026 4,858,366 (4)(5) 18.08 311,908 (6) 27.62 47,085 100
Mitch Leigh
29 West 57th Street
New York, New York 10019 1,487,341 (4)(7) 8.33 -- -- -- --
Marsden W. Miller, Jr.
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508 1,665,713 (4)(8) 7.11 -- -- -- --
</TABLE>
______________
(1) This table includes shares of Common Stock issuable upon
conversion of the shares of Amended Series A Preferred
Stock. Each share of Amended Series A Preferred Stock is
convertible into approximately 11 shares of Common Stock.
(2) The holders of Amended Series A Preferred Stock are
entitled to cast the same number of votes as the shares of
Common Stock then issuable upon conversion thereof
(currently 11 votes) on any matter subject to the vote of
Common Stockholders.
(3) Each share of Amended Series B Preferred Stock is
convertible into approximately 26.3 shares of Common Stock,
if the Common Stock issuable on conversion has not been
registered and 21 shares of Common Stock, if the Common
Stock issuable on conversion has been registered, subject to
adjustment, on or after August 31, 1998. Each share of
Amended Series B Preferred Stock is entitled to 50 votes per
share.
(4) Includes shares issuable upon the exercise of
outstanding stock purchase warrants exercisable within the
next 60 days.
(5) Includes 16,874 shares owned by Richard A. Kayne, a
director, CEO and President of Kayne Anderson Investment
Management, Inc., the general partner of KAIM Non-
Traditional, L.P. ("KAIM LP"). The shares over which Mr.
Kayne has sole voting and dispositive power are held by him
directly or by accounts for which he serves as trustee or
custodian. The shares over which Mr. Kayne and KAIM LP have
shared voting and dispositive power are held by accounts for
which KAIM LP serves as investment adviser (and, in some
cases as general partner). KAIM LP disclaims beneficial
ownership of these shares, except to the extent that they
are held by it or attributable to it by virtue of its
general partner interests in certain limited partnerships
holding such shares. Mr. Kayne disclaims beneficial
ownership of the shares reported, except those shares
attributable to him by virtue of his limited and general
partner interests in such limited partnerships and by virtue
of his indirect interest in the interest of KAIM LP in such
limited partnerships.
(6) Includes 2,610 shares owned by Richard Kayne, a director,
CEO and President of Kayne Anderson Investment Management,
Inc., the general partner of KAIM Non-Traditional, L.P.
("KAIM LP") The shares over which Mr. Kayne has sole voting
and dispositive power are held by him directly or by
accounts for which he serves as trustee or custodian. The
shares over which Mr. Kayne and KAIM LP have shared voting
and dispositive power are held by accounts for which KAIM LP
serves as investment adviser (and, in some cases as general
partner). KAIM LP disclaims beneficial ownership of these
shares, except to the extent that they are held by it or
attributable to it by virtue of its general partner
interests in certain limited partnerships holding such
shares. Mr. Kayne disclaims beneficial ownership of the
shares reported, except those shares attributable to him by
virtue of his limited and general partner interests in such
limited partnerships and by virtue of his indirect interest
in the interest of KAIM LP in such limited partnerships.
(7) Includes 104,132 shares owned by Mr. Leigh's wife. Does
not include shares and warrants held in custodial and trust
accounts for Mr. Leigh's minor children, which Mr. Leigh
does not control. Mr. Leigh disclaims beneficial ownership
of all shares held by his wife and minor children.
(8) Includes shares issuable upon the exercise of stock
options exercisable within the next 60 days; and 1,000,000
shares of restricted stock subject to certain forfeiture
provisions.
Security Ownership of Management
- ---------------------------------
The following table sets forth information concerning the
shares of the Company's Common Stock owned beneficially by each
director of the Company, and all directors and executive officers
as a group as of March 15, 1998. As of that date there were
22,926,333 shares of Common Stock issued and outstanding,
excluding 69,741 shares of Common Stock held as treasury stock,
and 1,129,453 shares of Amended Series A Preferred Stock issued
and outstanding. The mailing address for all such individuals is
XCL Ltd., 110 Rue Jean Lafitte, 2nd Floor, Lafayette, Louisiana
70508.
<TABLE>
<CAPTION>
Common Stock Amended Series A Preferred Stock
_____________________________ __________________________
Number Percent Number Percent
Name of Beneficial Owner of Shares of Class of Shares of Class
------------------------ --------- -------- --------- --------
<C> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1,665,713 (1)(2)(3)(4) 7.11 -- --
John T. Chandler 554,940 (1)(2)(3)(4) 2.40 20,000 (2) 0.02
Benjamin B. Blanchet 200 (5) -- -- --
Fred Hofheinz 6,666 (3) 0.03 -- --
Arthur W. Hummel, Jr. 6,666 (3) 0.03 -- --
Sir Michael Palliser 6,666 (3) 0.03 -- --
Francis J. Reinhardt, Jr. 40,798 (3)(6) 0.18 -- --
R. Thomas Fetters, Jr. 62,699 (4) 0.27 -- --
All directors and officers
of the Company as a group
(15 persons) 2,484,064 (3)(4) 10.83 20,000 (2) 0.02
</TABLE>
____________
(1) Includes 13,333 shares which are subject to an option
granted under agreement dated October 1, 1985 in favor of
John T. Chandler. Such shares are also included in Mr.
Chandler's holding inasmuch as the option is presently
exercisable. For purposes of the total holdings of the
group, the shares are included solely in Mr. Miller's share
holdings.
(2) Includes shares of restricted stock awarded to Messrs.
Miller and Chandler which are subject to certain forfeiture
provisions.
(3) Includes shares of Common Stock which may be acquired
pursuant to options which are exercisable within 60 days.
(4) Includes shares of Common Stock which may be acquired
pursuant to stock purchase warrants exercisable within 60
days.
(5) Represents shares of Common Stock owned by Mr. Blanchet's
children. Mr. Blanchet disclaims beneficial ownership of
these shares.
(6) Includes 6,666 shares of Common Stock owned by Carl H.
Pforzheimer & Co. of which Mr. Reinhardt is a general
partner and 13,333 shares owned by Petroleum and Trading
Corporation of which Mr. Reinhardt is an officer and
director. Mr. Reinhardt disclaims beneficial ownership of
the shares owned by Petroleum and Trading Corporation.
DESCRIPTION OF EXISTING DEBT
General
- -------
The Company's only outstanding long-term indebtedness is
represented by the Notes issued in connection with the Note
Offering concluded on May 20, 1997. The Notes are limited in
aggregate principal amount to $75 million. The Notes represent
senior obligations of the Company and rank pari passu in right of
payment with all indebtedness of the Company and senior to any
indebtedness that is expressly subordinated to the Notes. The
Notes are secured by (i) a pledge of all the capital stock of XCL-
China and any other future restricted subsidiary and (ii) the
subsidiary guarantees of XCL-China and any other Subsidiary
Guarantor. The Notes will mature on May 1, 2004. The Notes bear
interest at the rate of 13.50% per annum, payable semiannually on
May 1 and November 1 of each year, commencing November 1, 1997.
The Notes were issued pursuant to the terms of the Indenture
with Fleet National Bank as the original Trustee. The Trustee is
now State Street Bank and Trust Company of Connecticut N.A. The
terms of the Indenture are also governed by certain provisions
contained in the Trust Indenture Act of 1939, as amended. The
Indenture contains customary representations and warranties by
the Company as well as certain affirmative and negative covenants
briefly described elsewhere in this Prospectus. See "Risk
Factors -- Restrictions Imposed by Terms of the Company's
Indebtedness."
The Company also had $2.5 million in limited recourse debt
outstanding as of December 31, 1997, which was collateralized by
the Lutcher Moore Tract. Expressions of interest to purchase the
property have been received from several parties and the Company
is presently evaluating such proposals with the intent to sell
the property. The Company is also evaluating the possibility of
developing the property into a source of wetland mitigation
credits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Domestic
Properties."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of XCL consists of 500,000,000
shares of common stock, par value $0.01 per share ("Common
Stock"), and 2,400,000 shares of preferred stock, par value $1.00
per share ("Preferred Stock"), 70,000 of which have been
designated Amended Series B, Cumulative Convertible Preferred
Stock, and 2,085,000 of which have been designated Amended Series
A, Cumulative Convertible Preferred Stock.
Common Stock
------------
General
- -------
As of March 31, 1998, there were 22,926,333 shares of Common
Stock outstanding, excluding 69,471 shares held in treasury, held
by approximately 3,600 stockholders of record. Common Stock is
not redeemable, does not have any conversion rights and is not
subject to call. Holders of shares of Common Stock have no
preemptive right to maintain their percentage of ownership in
future offerings or sales of stock of XCL. Holders of shares of
Common Stock have one vote per share in all elections of
directors and on all other matters submitted to a vote of
stockholders of XCL. The holders of Common Stock are entitled to
receive dividends, if any, as and when declared from time to time
by the Board of Directors of XCL out of funds legally available
therefor (subject to restrictions in the Indenture and any credit
agreement). Upon liquidation, dissolution, or winding up of the
affairs of XCL, the holders of Common Stock will be entitled to
participate equally and ratably, in proportion to the number of
shares held, in the net assets of XCL available for distribution
to holders of Common Stock. The shares of Common Stock currently
outstanding are, and the shares of Common Stock underlying the
Warrants offered hereby when issued will be, fully paid and
nonassessable.
Effective December 17, 1997, the Company effected a one-for-
fifteen reverse stock split of its outstanding shares of Common
Stock.
The United States registrar and transfer agent for the
Common Stock is ChaseMellon Shareholder Services, L.L.C.,
Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey
07660, (Telephone No. 1-800-851-9677). The transfer agent for
the Common Stock in the United Kingdom is IRG plc, Balfour House,
390/398 High Road, Ilford, Essex IG1 1NQ, England (Telephone No.
0181-478-8241).
Special Charter and By-Law Provisions
- -------------------------------------
General Effect. The Board of Directors of the Company
believes that certain provisions in its Amended and Restated
Certificate of Incorporation, as amended ("Certificate of
Incorporation") and the Amended and Restated By-Laws of XCL (the
"By-Laws") will effectively reduce the possibility that a third
party could effect a sudden or surprise change of majority
control of the Company's Board of Directors or successfully
complete a takeover of XCL without the support of the incumbent
Board of Directors.
Certain provisions in the Certificate of Incorporation and
By-Laws of XCL may have significant effects on the ability of the
stockholders of XCL to change the composition of the incumbent
Board of Directors and to benefit from certain transactions that
are opposed by the incumbent Board of Directors.
XCL has adopted a number of provisions in its Certificate of
Incorporation and By-Laws that might discourage certain types of
transactions that involve an actual or threatened change of
control of XCL. The provisions may make it more difficult and
time consuming to change majority control of the Board of
Directors, and thus reduce the vulnerability of XCL to an
unsolicited offer to acquire XCL, particularly an offer that does
not contemplate the acquisition of all of XCL's outstanding
shares. As more fully described below, the Board believes that,
as a general rule, such unsolicited offers are not in the best
interests of XCL and its stockholders at this time.
The Board of Directors of XCL believes that the threat of
removal of XCL's management, in the case of a takeover bid,
severely curtails its ability to negotiate effectively with a
potential purchaser of XCL or its subsidiaries. In such a
situation, management is deprived of the time and information
necessary to evaluate the takeover proposal, to study alternative
proposals, and to help ensure that the best transaction involving
XCL is ultimately undertaken. The Board believes a takeover of
XCL without prior negotiation with XCL's management would be
detrimental to XCL and its stockholders. Consequently, the Board
thinks that the benefits of protecting its ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to
take over or restructure XCL outweigh the disadvantages of
discouraging such proposals. The Certificate of Incorporation
makes it more difficult for a holder of a substantial block of
Common Stock to acquire control of, or to remove, the incumbent
Board and could thus have the effect of entrenching incumbent
management. At the same time, the anti-takeover provisions help
ensure that the Board, if confronted by a surprise proposal from
a third party who has recently acquired a block of Common Stock,
will have sufficient time to review the proposal and alternatives
to it and to seek better proposals for its stockholders,
employees, suppliers, customers, and others.
The anti-takeover provisions are intended to encourage
persons seeking to acquire control of XCL to initiate such an
acquisition through arm's-length negotiations with XCL's
management and Board of Directors. The Certificate of
Incorporation could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain
control of XCL, even though such an attempt might be beneficial
to XCL and its stockholders.
Fair Price Provision. The purchaser in corporate takeovers
often pays cash to acquire a controlling equity interest in a
corporation and then arranges a transaction to acquire the
balance of the shares for a lower price or less desirable
consideration (frequently securities of the purchaser that do not
have an established trading market at the time of issue) or both.
This practice is known as "two-tier pricing" and tends (and may
be designed) to cause stockholders to accept the initial offer
for fear of becoming minority stockholders in a controlled
corporation or being forced to accept a lower price or less
favorable consideration for their shares. To alleviate this
problem, XCL has included in its Certificate of Incorporation a
provision (the "Fair Price Provision") designed to assure that
all stockholders of XCL will receive substantially the same price
for their shares in transactions in which XCL is acquired in two
or more steps.
The Fair Price Provision discourages two-step acquisitions
of XCL by requiring that mergers and certain other business
combinations involving XCL and any Interested Stockholder (as
hereinafter defined) either (1) meet certain minimum price and
procedural requirements, (2) be approved by a majority of the
members of XCL's Board of Directors who are unaffiliated with the
Interested Stockholder and who were directors before the
Interested Stockholder became a 20% stockholder, (3) be approved
by the favorable vote of at least 67% of the voting power of the
Voting Stock and a majority of the outstanding shares of Voting
Stock (as hereinafter defined) held by persons who are neither
Interested Stockholders nor affiliates of Interested
Stockholders, or (4) be approved by the holders of at least 80%
of the outstanding shares of Voting Stock.
The Fair Price Provision is designed to prevent a purchaser
from utilizing two-tier pricing and similar tactics in an
attempted takeover of XCL. It has the overall effect of making
it more difficult to acquire and exercise control of XCL and may
provide officers and directors with enhanced ability to retain
their position in the event of a takeover bid. It is not
designed to prevent or discourage all tender offers for control
of XCL. The Fair Price Provision does not preclude an offeror
from making a tender offer for some of the shares of XCL's stock
without proposing a Business Combination (as defined below) in
which the remaining shares of stock are purchased. Except for
the restrictions on Business Combinations, the Fair Price
Provision will not prevent a holder of a controlling interest of
the XCL Common Stock from exercising control over XCL or
increasing its interest in XCL. The Board will support or oppose
any future takeover proposal, whether or not the proposal
satisfies the fair price requirements for the Fair Price
Provision, if the Board determines that its support or opposition
is in the best interests of XCL's stockholders.
The Fair Price Provision will not limit the ability of a
third party to effect a Business Combination, as long as such
third party owns (or can obtain the affirmative votes of) at
least 80% of the outstanding shares of all classes of capital
stock entitled to vote generally in the election of directors
(the "Voting Stock").
Certain Definitions Used in the Fair Price Provision. An
"Interested Stockholder" is defined in the Fair Price Provision
as anyone who is the beneficial owner of 20% or more of the
Voting Stock, and includes any person who, in a transaction not
involving a public offering, is an assignee of or has succeeded
to any shares of Voting Stock of XCL that were at any time within
the prior two-year period beneficially owned by an Interested
Stockholder. The term "beneficial owner" includes persons
directly and indirectly owning or having the right to acquire or
vote the stock. The Board of Directors of XCL considers that a
20% holding, which is four times the minimum ownership
requirement imposed in connection with various reporting
requirements under the Exchange Act for stockholders of public
companies, is appropriate to define an Interested Stockholder.
A "Business Combination" includes the following
transactions: (1) a merger or consolidation of XCL or any
subsidiary with an Interested Stockholder or with any other
company or entity that is, or after such merger or consolidation
would be, an affiliate of an Interested Stockholder; (2) the sale
or other disposition by XCL or a subsidiary of assets having an
aggregate fair market value equal to 10% or more of the net
assets of XCL or more if an Interested Stockholder (or an
affiliate thereof) is a party to the transaction; (3) the
issuance or transfer of stock or other securities of XCL or of a
subsidiary to a person or entity that, immediately before such
issuance, is an Interested Stockholder (or an affiliate thereof)
in exchange for cash or property (including stock or other
securities) having an aggregate fair market value equal to 10% or
more of the net assets of XCL; (4) the adoption of any plan or
proposal for the liquidation or dissolution of XCL proposed by or
on behalf of an Interested Stockholder (or an affiliate thereof);
or (5) any reclassification of securities, recapitalization,
merger with a subsidiary or other transaction that has the
effect, directly or indirectly, of increasing the proportionate
share of the outstanding stock (or securities convertible into
stock) of any class of XCL or any of its subsidiaries owned by an
Interested Stockholder or affiliate.
A "Disinterested Director" is a member of the Board of
Directors of XCL who is not affiliated with or a nominee of an
Interested Stockholder and was a director of XCL immediately
before the time the Interested Stockholder became an Interested
Stockholder, and any successor to such Disinterested Director who
is not affiliated with or a nominee of an Interested Stockholder
and was recommended for nomination or election to the Board by a
majority of the Disinterested Directors then on the Board.
Requirements for Certain Business Combinations Without the
Fair Price Provision. If XCL's Certificate of Incorporation did
not include the Fair Price Provision, mergers, consolidations,
the sale of substantially all of the assets of XCL, the adoption
of a plan of dissolution of XCL and reclassification of
securities and recapitalizations of XCL involving amendments to
the Certificate of Incorporation would require approval by the
holders of a majority of the voting power of the Voting Stock.
Certain other transactions, such as sales of less than
substantially all of the assets of XCL, certain mergers involving
a wholly owned subsidiary of XCL and recapitalizations and
reclassifications not involving amendments to the Certificate of
Incorporation would not require stockholder approval.
Requirements for Certain Business Combinations Under the
Fair Price Provision. Under the Fair Price Provision, it will be
a condition to a Business Combination with an Interested
Stockholder that the transaction either (1) meet certain price
criteria and procedural requirements (discussed below), or (2) be
approved by a majority of the Disinterested Directors, or (3) be
approved by the favorable vote of at least 67% of the voting
power of the Voting Stock and a majority of the outstanding
shares of Voting Stock held by persons who are neither Interested
Stockholders or affiliates of Interested Stockholders, or (4) be
approved by the favorable vote of at least 80% of the voting
power of the Voting Stock. If the minimum price criteria and
procedural requirements are met or the requisite approval of the
Disinterested Directors is obtained with respect to a particular
Business Combination, then the normal requirements of Delaware
law will apply, and only a majority vote of the outstanding
Voting Stock will be required or, for certain transactions as
noted above, no stockholder vote will be necessary. If the
minimum price criteria and procedural requirements are not met or
the requisite approval of the Disinterested Directors is not
obtained, or the requisite vote of shareholders not affiliated
with the Interested Stockholder is not obtained, then a Business
Combination with an Interested Stockholder will require an 80%
stockholder vote. One consequence of the Fair Price Provision,
therefore, is that additional time and expense would be required
to effect certain Business Combinations due to the need to hold a
special stockholders' meeting.
Exceptions to Higher Vote Requirements under the Fair Price
Provision. The 80% affirmative stockholder vote contemplated by
the Fair Price Provision will be required only if (1) the minimum
price criteria and procedural requirements described under (a)
and (b) below are not satisfied or (2) the transaction is not
approved by a majority of the Disinterested Directors or (3) the
requisite vote of shareholders not affiliated with the Interested
Stockholder is not obtained.
(a) Minimum Price Criteria. In a Business Combination
involving cash or other consideration paid to XCL's stockholders,
the consideration must be either cash or the same type of
consideration used by the Interested Stockholder in acquiring the
largest portion of its Voting Stock before the first public
announcement of the terms of the proposed Business Combination
(the "Announcement Date"). In addition, the fair market value
(calculated in accordance with the Fair Price Provision) of the
consideration to be paid on the date the Business Combination was
consummated (the "Consummation Date") must meet certain minimum
price criteria described herein.
In the case of payments to holders of Common Stock and
Preferred Stock, the fair market value per share of such payments
must be at least equal in value to the higher of (1) the highest
price per share (including brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested Stockholder
in acquiring any shares of such class or series of stock during
the two years before the Announcement Date (even if the
Interested Stockholder was not an Interested Stockholder at the
time of any such acquisitions) or in the transaction in which it
became an Interested Stockholder (whichever is higher), or (2)
the fair market value per share of such class or series of stock
on the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (the "Determination
Date"), whichever is higher; provided, however, the holders of
Preferred Stock shall be entitled to receive an amount at least
equal to the highest preferential amount payable upon
dissolution, liquidation or winding up of XCL applicable thereto
if the Interested Stockholder has not previously purchased shares
of Preferred Stock or such price paid for Preferred Stock is
lower than such preferential amount. If the Interested
Stockholder purchased any shares of Common Stock during the two-
year period before the Announcement Date, the minimum price might
be fixed based on a purchase occurring as long as two years
before the Announcement Date. If the Determination Date was more
than two years before the Announcement Date, then the minimum
price could be set as of such earlier date. If the Interested
Stockholder did not purchase any shares of Common Stock during
the two-year period before the Announcement Date or in the
transaction on the Determination Date in which it became an
Interested Stockholder (e.g., if it became an Interested
Stockholder through the acquisition of shares of another class of
Voting Stock), the minimum price would be as determined under (2)
above.
For example, if the acquisition by an Interested Stockholder
of its Common Stock interest was by cash purchases in open market
transactions and the highest price paid per share of Common Stock
during the previous two years (including in the transaction in
which it became an Interested Stockholder) was $5.00, and
assuming that the fair market values per share of Common Stock on
the Determination Date and on the Announcement Date were $4.00
and $4.50, respectively, the amount required to be paid to the
holders of Common Stock would be the amount per share in cash
equal to the higher of (1) $5.00 (the highest price paid), and
(2) $4.50 (fair market value on the Announcement Date).
Accordingly, in order to comply with the Fair Price Provision's
minimum price criteria, the Interested Stockholder would be
required to pay at least $5.00 per share in cash to holders of
Common Stock in the Business Combination. If the Interested
Stockholder did not purchase any shares of Common Stock during
the two-year period before becoming an Interested Stockholder
(e.g., if it became an Interested Stockholder through the
acquisition of shares of another class of Voting Stock), the
minimum price payable under the Fair Price Provision for shares
of Common Stock would be the fair market value on the
Announcement Date or on the Determination Date, whichever is
higher, resulting in a price, in the foregoing example, of $4.50
per share in cash. All such prices shall be subject to an
appropriate adjustment in the event of any stock dividend, stock
split, subdivision, combination of shares or similar event.
In the case of payments to holders of any class or series of
XCL's Voting Stock other than Common Stock, the fair market value
per share of such payments must be at least equal to the higher
of (a) the highest price per share determined with respect to
such class or series of stock in the same manner as described in
clauses (1) and (2) of the preceding paragraphs, or (b) the
highest preferential amount per share to which the holders of
such class or series of Voting Stock are entitled in the event of
a voluntary or involuntary liquidation of XCL.
Under the minimum price requirements, the fair market value
of non-cash consideration to be received by holders of shares of
any class of Voting Stock in a Business Combination is to be
determined in good faith by the Board of Directors of XCL.
Under the Fair Price Provision, the Interested Stockholder
is required to meet the minimum price with respect to each class
of stock before proposing the Business Combination. If the
minimum price criteria and the procedural requirements (discussed
below) are not met with respect to each class of Voting Stock,
then an 80% vote of stockholders will be required to approve the
Business Combination unless the transaction is approved by the
favorable vote of at least 67% of the voting power of the Voting
Stock and a majority of the outstanding shares of Voting Stock
held by persons who are neither Interested Stockholders nor
affiliates of Interested Stockholders, or by a majority of the
Disinterested Directors.
If the proposed Business Combination does not involve
receipt by the other stockholders of XCL of cash or other
property, such as a sale of assets or an issuance of XCL's
securities to an Interested Stockholder, then the price criteria
discussed above will not apply and an 80% vote of stockholders
will be required unless the transaction is approved by the
favorable vote of at least 67% of the voting power of the Voting
Stock and a majority of the outstanding shares of Voting Stock
held by persons who are neither Interested Stockholders nor
affiliates of Interested Stockholders, or by a majority of the
Disinterested Directors.
(b) Procedural Requirements. Under the Fair Price
Provision, unless the Business Combination is approved by a
majority of the Disinterested Directors, the Business Combination
will be subject to the 80% stockholder vote requirement, even if
it satisfies the minimum price criteria, in each of the following
situations:
(1) If XCL, after the Interested Stockholder became
an Interested Stockholder, (i) reduced the rate of dividends
paid on the Common Stock (unless such reduction was
necessary to reflect any subdivision of the Common Stock),
or (ii) failed to increase the rate of dividends as
necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or
any similar transaction which has the effect of reducing the
number of outstanding shares of Common Stock, unless such
reduction was approved by a majority of the Disinterested
Directors. This provision is designed to prevent an
Interested Stockholder from attempting to depress the market
price of the Common Stock before proposing a Business
Combination by reducing dividends on the Common Stock, and
thereby reducing the consideration required to be paid
pursuant to the minimum price provisions of the Fair Price
Provision.
(2) If the Interested Stockholder acquired any
additional shares of Voting Stock except in the transaction
pursuant to which it became an Interested Stockholder. This
provision is intended to prevent an Interested Stockholder
from purchasing additional shares of Voting Stock without
compliance with the provisions of the Fair Price Provision.
(3) If the Interested Stockholder, at any time
after it became an Interested Stockholder, whether in
connection with the proposed Business Combination or
otherwise, received the benefits of any loss or other
financial assistance or tax advantage provided by XCL (other
than proportionately as a stockholder). This provision is
intended to deter an Interested Stockholder from self-
dealing or otherwise taking advantage of its equity position
in XCL by using XCL's resources to finance the proposed
Business Combination or otherwise for its own purposes in a
manner not proportionately available to all stockholders.
Under the Fair Price Provision, unless the Business
Combination is approved by a majority of the Disinterested
Directors, to avoid the 80% stockholder vote requirement even if
the other conditions described above are met, a proxy or
information statement disclosing the terms and conditions of the
proposed Business Combination and complying with the requirements
of the proxy rules promulgated under the Exchange Act will have
to be mailed to all stockholders of XCL at least 30 days before
the consummation of a Business Combination. This provision is
intended to ensure that XCL's stockholders will be fully informed
of the terms and conditions of the proposed Business Combination
even if the Interested Stockholder is not otherwise legally
required to disclose such information to stockholders.
NONE OF THE MINIMUM PRICE OR PROCEDURAL REQUIREMENTS
DESCRIBED ABOVE WILL APPLY IN THE CASE OF A BUSINESS COMBINATION
APPROVED BY A MAJORITY OF THE DISINTERESTED DIRECTORS OR THE
FAVORABLE VOTE OF 67% OF THE OUTSTANDING SHARES AND A MAJORITY OF
THE SHARES HELD BY PERSONS WHO ARE NEITHER THE INTERESTED
STOCKHOLDER NOR AFFILIATES OF THE INTERESTED STOCKHOLDER, AND, IN
THE ABSENCE OF SUCH APPROVAL, ALL OF SUCH REQUIREMENTS WILL HAVE
TO BE SATISFIED TO AVOID THE 80% STOCKHOLDER VOTE REQUIREMENT.
Classified Board. XCL's Board of Directors is divided into
three classes of directors serving staggered three-year terms,
with one class of directors to be elected at each annual meeting
of shareholders to hold office until the end of their term or
until their successors have been elected and qualified. Directors
may not be removed without cause except upon the affirmative vote
of the holders of 67% of the outstanding shares of Voting Stock.
This provision makes it more difficult to effect an involuntary
change in incumbent management.
No Cumulative Voting. Neither the Certificate of
Incorporation nor the By-Laws permit cumulative voting. Thus, a
purchaser of a block of Common Stock representing less than a
majority of the outstanding shares will have no assurance of
proportional representation on the Board of Directors.
No Action by Stockholder Consent. Delaware law provides
that, unless a corporation's certificate of incorporation denies
the right, stockholders may act by a written consent executed by
the holders of a majority of the outstanding shares of voting
stock without holding a special or annual meeting of
stockholders. The Certificate of Incorporation prohibits action
that is required or permitted to be taken at any annual or
special meeting of stockholders of XCL from being taken by the
written consent of stockholders without a meeting unless
authorized by a majority of the Disinterested Directors. The
intent of this provision is to provide an open forum at a
stockholders' meeting for all stockholders to have a chance to
attend and be heard. This provision could have an anti-takeover
effect and tend to entrench management by forcing the holder or
holders of a majority of the outstanding stock to exercise their
prerogatives of majority ownership only by voting at a
stockholders' meeting rather than by written consent.
Supermajority Voting. The Fair Price Provision may be
altered, amended, or repealed only if the holders of 80% or more
of the outstanding shares of Voting Stock entitled to vote
thereon or 67% or more of the outstanding shares voting together
with a majority of the outstanding shares held by persons other
than the Interested Stockholder and its affiliates, vote in favor
of such action. The other anti-takeover provisions and certain
other provisions in the Certificate of Incorporation may be
altered, changed, amended, or repealed only if the holders of 67%
or more of the outstanding shares of voting stock of XCL entitled
to vote thereon vote in favor of such action. Without this
supermajority voting, the beneficial effects of the provisions
requiring such greater percentage of vote could be nullified by
subsequent amendments approved by a vote of the holders of only a
majority of Common Stock.
Preferred Stock
---------------
General
- -------
Under the Certificate of Incorporation, the Board of
Directors of XCL may direct the issuance of up to 2,400,000
shares of Preferred Stock, in one or more series and with rights,
preferences, privileges, and restrictions, including, without
limitation, dividend rights, voting rights, conversion rights,
terms of redemption, and liquidation preferences, that may be
fixed or designated by the Board of Directors without any further
vote or action by XCL's stockholders. The following description
of Preferred Stock sets forth certain general terms and
provisions of the four series of Preferred Stock which are
currently issued and outstanding. As discussed elsewhere in this
Prospectus, effective November 10, 1997, the Company amended,
recapitalized and combined the outstanding shares of Series A
Preferred Stock and Series E Preferred Stock into shares of
Amended Series A Preferred Stock which, together with the Amended
Series A Preferred Stock issued in the Equity Offering,
constituted a single class of approximately $93 million (in
aggregate liquidation preference) of Amended Series A Preferred
Stock at that time. The shares of Amended Series A Preferred
Stock currently outstanding have an aggregate liquidation
preference of approximately $101 million. Effective January 16,
1997, the Series F Preferred Stock was mandatorily converted into
633,893 shares of Common Stock. On March 3, 1998, the Series B
Preferred Stock was sold by the holder thereof, and the
purchasers exchanged the shares of Series B Preferred Stock for
an aggregate 44,465 shares of Amended Series B Preferred Stock.
In addition, such purchasers were issued an additional 2,620
shares (in the aggregate) of Amended Series B Preferred Stock in
payment of accrued and unpaid dividends on the Series B Preferred
Stock. The description of Preferred Stock set forth below and the
description of the terms of a particular series of Preferred
Stock do not purport to be complete and are qualified in their
entirety by reference to the Certificate of Incorporation and the
certificate of designation relating to that series.
The rights, preferences, privileges, and restrictions of the
Preferred Stock of each series shall be as stated in the
Certificate of Incorporation and, to the extent not stated
therein, may be fixed by the certificate of designation relating
to such series, which shall specify the terms of the Preferred
Stock as follows:
(a) the maximum number of shares to constitute the
series and the distinctive designations thereof;
(b) the annual dividend rate, if any, on shares of
the series and the date or dates from which dividends shall
commence to accrue or accumulate, and whether dividends
shall be cumulative;
(c) the price at and the terms and conditions on
which the shares of the series may be redeemed, including
the time during which shares of the series may be redeemed,
the premium, if any, over and above the par value thereof,
and any accumulated dividends thereon that the holders of
shares of the series shall be entitled to receive upon the
redemption thereof, which premium may vary at different
dates and may also be different with respect to shares
redeemed through the operation of any retirement or sinking
fund;
(d) the liquidation preference, if any, over and
above the par value thereof, and any accumulated dividends
thereon, that the holders of shares of the series shall be
entitled to receive upon the voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of
XCL;
(e) whether or not the shares of the series shall
be subject to operation of a retirement or sinking fund,
and, if so, the extent and manner in which any such
retirement or sinking fund shall be applied to the purchase
or redemption of the shares of the series for retirement or
for other corporate purposes, and the terms and provisions
relative to the operations of such retirement or sinking
fund;
(f) the terms and conditions, if any, on which the
shares of the series shall be convertible into, or
exchangeable for, shares of any other class or classes of
capital stock of XCL or any series of any other class or
classes, or of any other series of the same class, including
the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same,
provided that shares of such series may not be convertible
into shares of a series or class that has prior or superior
rights and preferences as to dividends or distribution of
assets of XCL upon voluntary or involuntary dissolution or
winding up of the affairs of XCL;
(g) the voting rights, if any, on the shares of the
series; and
(h) any or all other preferences and relative,
participating, optional, or other special rights, or
qualifications, limitations, or restrictions thereof.
Amended Series A Preferred Stock
- --------------------------------
On May 20, 1997, the Company issued 294,118 shares of
Amended Series A Preferred Stock in connection with the Equity
Offering. In subsequent transactions, the Company has issued
868,997 shares of Amended Series A Preferred Stock including
shares issuable in payment of the May 1, 1998 dividend on the
Amended Series A Preferred Stock.
Dividend Rights
---------------
Holders of the Amended Series A Preferred Stock are entitled
to receive when, as and if declared by the Board of Directors,
out of the funds of the Company legally available therefor, an
annual dividend of $8.075 per share, payable semi-annually on May
1 and November 1 in each year, commencing November 1, 1997.
Dividends are payable in additional shares of Amended Series A
Preferred Stock (valued at $85.00 per share) through November 1,
2000, and thereafter in cash, or at the Company's election, in
shares of Amended Series A Preferred Stock (valued at $85.00 per
share). Dividends on the Amended Series A Preferred Stock are
cumulative from May 20, 1997, and will be payable, when, as and
if declared, to holders of record on the applicable record date
as shall be fixed by the Board of Directors. Dividends in arrears
may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on such date
not exceeding 60 days preceding the payment date thereof, as may
be fixed by the Board of Directors. Accrued but unpaid dividends
will not bear interest. Dividends payable for any partial semi-
annual period will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
If dividends are not paid in full on all outstanding shares
of the Amended Series A Preferred Stock and any other capital
stock of the Company ranking on a parity with the Amended Series
A Preferred Stock as to dividends, all dividends declared on the
Amended Series A Preferred Stock and such other parity stock may
only be declared and paid pro rata so that in all cases the
amount of dividends declared per share on the Amended Series A
Preferred Stock and such other parity stock will bear to each
other the same ratio that accrued and unpaid dividends per share
on the shares of the Amended Series A Preferred Stock and such
other parity stock bear to each other. So long as they are
outstanding, the Company's existing shares of Series B Preferred
Stock shall rank on a parity with the Amended Series A Preferred
Stock as to dividends or upon liquidation, dissolution and
winding up. Unless full cumulative dividends on all outstanding
shares of the Amended Series A Preferred Stock have been paid, no
dividends (other than in Common Stock or other stock ranking
junior to the Amended Series A Preferred Stock as to dividends
and upon liquidation, dissolution or winding up) may be paid,
declared or set aside for payment, or any other distributions
made on the Common Stock or on any other stock of the Company
ranking junior to the Amended Series A Preferred Stock as to
dividends or upon liquidation, dissolution or winding up, nor may
any Common Stock or any other stock of the Company ranking junior
to or on a parity with the Amended Series A Preferred Stock be
redeemed, purchased or otherwise acquired for any consideration
by the Company (except by conversion into or exchange for stock
of the Company ranking junior to the Amended Series A Preferred
Stock as to dividends and upon liquidation, dissolution or
winding up).
Under Delaware law, the Company may declare and pay
dividends or make other distributions on its capital stock only
out of surplus, as defined in the Delaware General Corporation
Law (the "DGCL"). On December 31, 1997, the Company had available
surplus of approximately $51 million. The payment of dividends
and any future operating losses will reduce such surplus of the
Company, which may adversely affect the ability of the Company to
continue to pay dividends on the Amended Series A Preferred
Stock. In addition, no dividends or distributions may be
declared, paid or made if the Company is or would be rendered
insolvent by virtue of such dividend or distribution, and the
Indenture limits the Company's ability to pay cash dividends. See
"Dividend Policy."
Conversion Rights
-----------------
The holder of any shares of Amended Series A Preferred Stock
will have the right, at the holder's option, to convert any or
all of such shares into Common Stock at any time after the
Initial Conversion Date at a conversion price ("Conversion
Price") of, initially, $0.50 per share (subject to adjustment as
described below), or an initial effective conversion rate
("Conversion Rate") of 170 shares of Common Stock for each share
of Amended Series A Preferred Stock (subject to adjustment as
described below), except that if the Amended Series A Preferred
Stock is called for redemption, the conversion right will
terminate as to the shares called for redemption at 5:00 p.m.,
New York City time, on the business day prior to the date fixed
for such redemption. Except as provided in the next paragraph,
no payments or adjustments in respect of dividends on shares of
Amended Series A Preferred Stock surrendered for conversion,
whether paid or unpaid and whether or not in arrears, or on
account of any dividend on the Conversion Stock issued upon
conversion, shall be made by the Company upon the conversion of
any shares of Amended Series A Preferred Stock, at the option of
the holder, including any conversion described under "-- Special
Conversion Rights" below. The holder of record of shares of
Amended Series A Preferred Stock on a dividend record date who
surrenders such shares for conversion during the period between
such dividend record date and the corresponding dividend payment
date will be entitled to receive the dividend on such dividend
payment date notwithstanding the conversion of such shares;
provided, however, that, unless such shares, prior to such
surrender, had been called for redemption on a redemption date
during the period between such dividend record date and such
dividend payment date, such shares must be accompanied, upon
surrender for conversion, by payment from the holder to the
Company of an amount equal to the dividend payable on such shares
on that dividend payment date. No fractional shares of Common
Stock will be issued upon conversion but, in lieu thereof, an
appropriate amount will be paid in cash based on the Market Price
(as defined below) for the shares of Common Stock on the day of
such conversion. No adjustment in the Conversion Price will be
required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the Conversion Price;
provided, however, that any adjustment which is not made will be
carried forward and taken into account in any subsequent
adjustment.
If the Company, by dividend or otherwise, declares or makes
a distribution on its Common Stock referred to in clause (d) or
(e) of the next paragraph, the holders of Amended Series A
Preferred Stock, upon the conversion thereof subsequent to the
close of business on the date fixed for the determination of
stockholders entitled to receive such distribution and prior to
the effectiveness of the Conversion Price adjustment in respect
of such distribution, will be entitled to receive for each share
of Common Stock into which Amended Series A Preferred Stock is so
converted the portion of the evidences of indebtedness, shares of
capital stock, cash and assets so distributed applicable to one
share of Common Stock; provided, however, that the Company may,
with respect to all holders so converting, in lieu of
distributing any portion of such distribution not consisting of
cash or securities of the Company, pay such holder cash equal to
the fair market value thereof (as determined by the Board of
Directors).
The Conversion Price and the Conversion Rate will be subject
to adjustment in certain events including, without duplication,
(a) dividends (and other distributions) payable in Common Stock
to all holders of Common Stock; (b) the issuance to all holders
of Common Stock of rights or warrants, entitling holders of such
rights or warrants to subscribe for or purchase Common Stock at
less than the current Market Price; (c) subdivisions and
combinations of Common Stock; (d) distributions to all holders of
Common Stock of evidences of indebtedness of the Company, shares
of capital stock, cash or assets (including securities, but
excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions paid
exclusively in cash); and (e) distributions to all holders of
Common Stock consisting of cash, but excluding (i) cash that is
part of a distribution referred to in (d) above and (ii) any
quarterly cash dividend to the extent it does not exceed the
amount per share of Common Stock of the next preceding quarterly
cash dividend (as adjusted to reflect any of the events referred
to in clauses (a) through (d) of this sentence), or all of any
such quarterly cash dividend if the amount thereof per share of
Common Stock multiplied by four does not exceed 15% of the
current Market Price of the Common Stock on the trading day next
preceding the date of declaration of such dividend. As a result
of the Reverse Stock Split, effective December 17, 1997 the
initial Conversion Price and the initial Conversion Rate were
adjusted to $7.50 and 11 shares, respectively.
The Company from time to time may voluntarily reduce the
Conversion Price (or increase the Conversion Rate) by any amount
for any period of at least 20 days, in which case the Company
will give at least 15 days' notice of such reduction (or
increase), if the Board of Directors of the Company has made a
determination that such reduction (or increase) would be in the
best interests of the Company, which determination will be
conclusive.
If the Company is party to any transaction pursuant to which
the Common Stock is converted into the right to receive other
securities, cash or other property, including by way of
recapitalization or reclassification (other than changes in par
value, subdivisions or combinations of outstanding shares),
consolidation, merger or sale of all or substantially all of its
assets to, any person, then upon consummation of such transaction
the Amended Series A Preferred Stock shall be convertible for the
kind and amount of shares of stock and other securities and
property that the holder of the Amended Series A Preferred Stock
would have owned immediately after any such transaction if the
holder had converted his shares immediately prior to the
effective date thereof (which shares of stock and other
securities and property may not necessarily be of equal value to
the Common Stock).
The term "Market Price" of the Common Stock for any day
means the last reported sale price, regular way, on such day, or,
if no sale takes place on such day, the average of the reported
closing bid and asked prices on such day, regular way, in either
case reported on the AMEX Consolidated Transaction Tape, or, if
the Common Stock is not listed or admitted to trading on the AMEX
on such day, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, if the
Common Stock is listed on a national securities exchange, or the
National Market Tier of The NASDAQ Stock Market ("NASDAQ NSM")
or, if not listed or admitted to trading on such quotation
system, on the principal quotation system on which the Common
Stock may be listed or admitted to trading or quoted or, if not
listed or admitted to trading or quoted on any national
securities exchange or quotation system, the average of the
closing bid and asked prices of the Common Stock in the over-the-
counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or similar generally accepted
reporting service, or, if not so available in such manner, as
furnished by any AMEX member firm selected from time to time by
the Board of Directors of the Company for that purpose or, if not
so available in such manner, as otherwise determined in good
faith by the Board of Directors of the Company.
Mandatory Conversion Rights
---------------------------
The Amended Series A Preferred Stock may be converted, in
whole and not in part, at the election of the Company, at the
then prevailing Conversion Price at any time after November 20,
1997, provided that the Company is current in the payment of
dividends to the conversion date, that the Common Stock shall
have been traded on the AMEX or other national securities
exchange on which the Common Stock is then listed or on the
Nasdaq NSM for 20 trading days during any 30 consecutive trading
day period at a Current Market Price (as defined below) equal to
or greater than 150% of the prevailing Conversion Price, subject
to adjustment in the same manner and for the same events as the
Conversion Price. The term "Current Market Price" of the Common
Stock for any day means the reported closing bid price, regular
way, on such day, as reported on the AMEX, or, if the Common
Stock is not listed or admitted to trading on the AMEX on such
day, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading, if the Common
Stock is listed on a national securities exchange, or the NASDAQ
NSM or, if the Common Stock is not quoted or admitted to trading
on such quotations system, on the principal quotation system in
which the Common Stock may be listed or admitted to trading or
quoted or, if not listed or admitted to trading or quoted on any
national securities exchange or quotation system, the average of
the closing bid and asked prices of the Common Stock in the over-
the-counter market on the day in question as reported by the
National Quotation Bureau Incorporated, or similar generally
accepted reporting service, or, if not so available in such
manner, as furnished by any AMEX member firm selected from time
to time by the Board of Directors of the Company for that purpose
or, if not so available in such manner, as otherwise determined
in good faith by the Board of Directors of the Company, which
determination shall be conclusive.
Special Conversion Rights
-------------------------
The Amended Series A Preferred Stock has a special
conversion right that becomes effective upon the occurrence of
certain types of significant transactions affecting ownership or
control of the Company or the market for the Common Stock. The
purpose of the special conversion right is to provide (subject to
certain exceptions) loss protection upon the occurrence of a
Change in Control (as defined below) or a Fundamental Change (as
defined below) at a time when the Market Value (as defined below)
of the Common Stock is less than the then prevailing Conversion
Price. In such situations, the special conversion right would,
for a limited period, reduce the then prevailing Conversion Price
to the Market Value of the Common Stock.
The special conversion right is intended to provide loss
protection to investors in certain circumstances while not giving
holders a veto power over significant transactions affecting
ownership or control of the Company. Although the special
conversion right may render more costly or otherwise inhibit
certain proposed transactions, its primary purpose is not to
inhibit or discourage takeovers or other business combinations.
Each holder of Amended Series A Preferred Stock will be entitled
to a special conversion right if a Change of Control or
Fundamental Change occurs. A Change of Control will occur if a
person or group acquires more than 50% of the Common Stock. A
Fundamental Change is, generally, a sale of all or substantially
all of the Company's assets or a transaction in which at least
66% of the Common Stock is transferred for, or is converted into,
any other assets. However, if the majority of the value of the
consideration received in a transaction by holders of Common
Stock is Marketable Stock or if the holders of Common Stock hold
a majority of the voting stock of the Company's successor, the
transaction will not be a Fundamental Change, and holders of the
Amended Series A Preferred Stock will not have special conversion
rights as a result of such transaction. In addition, the special
conversion right arising upon a Change of Control shall only be
applicable with respect to the first Change of Control that
occurs after the first date of issuance of any shares of Amended
Series A Preferred Stock. The full definitions of the terms
"Change of Control" and "Fundamental Change" appear below.
A special conversion right will permit a holder of Amended
Series A Preferred Stock, at the holder's option during the 30-
day period described below, to convert all, but not less than
all, of the holders' Amended Series A Preferred Stock at a
Conversion Price equal to the Market Value of the Common Stock. A
holder exercising a special conversion right will receive Common
Stock if a Change of Control occurs and, if a Fundamental Change
occurs, will receive the same consideration received for the
number of shares of Common Stock into which the holder's Amended
Series A Preferred Stock would have been convertible at the
Market Value of the Common Stock. In either case, however, the
Company or its successor may, at its option, elect to provide the
holder with cash equal to the Market Value of the number of
shares of Common Stock into which the holder's Amended Series A
Preferred Stock is convertible.
The Company will mail to each registered holder of Amended
Series A Preferred Stock a notice setting forth details of any
special conversion right occasioned by a Change of Control or
Fundamental Change within 30 days after the event occurs. A
special conversion right may be exercised only within the 30-day
period after the notice is mailed and will expire at the end of
that period. Exercise of a special conversion right is
irrevocable, and all Amended Series A Preferred Stock tendered
for conversion will be converted at the end of the 30-day period
mentioned in the preceding sentence.
Amended Series A Preferred Stock that is not converted
pursuant to a special conversion right will continue to be
convertible pursuant to the general conversion rights described
above.
The special conversion right is not intended to, and does
not, protect holders of Amended Series A Preferred Stock in all
circumstances that might affect ownership or control of the
Company or the market for the Common Stock, or otherwise
adversely affect the value of an investment in the Amended Series
A Preferred Stock. The ability to control the Company may be
obtained by a person even if that person does not, as is required
to constitute a Change of Control, acquire a majority of the
Company's voting stock. The Company and the market for the Common
Stock may be affected by various transactions that do not
constitute a Fundamental Change. In particular, transactions
involving transfer or conversion of less than 66% of the Common
Stock may have a significant effect on the Company and the market
for the Common Stock, as could transactions in which holders of
Common Stock receive primarily Marketable Stock or continue to
own a majority of the voting securities of the successor to the
Company. In addition, if the special conversion right arises as
the result of a Fundamental Change, the special conversion right
will allow a holder exercising a special conversion right to
receive the same type of consideration received by the holders of
Common Stock and, thus, the degree of protection afforded by the
special conversion right may be affected by the type of
consideration received.
As used herein, a "Change of Control" with respect to the
Company shall be deemed to have occurred at the first time after
the first issuance of any Amended Series A Preferred Stock that
any person (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) including a group (within the meaning of Rule 13d-5 under
the Exchange Act), together with any of its Affiliates or
Associates (as defined below), files or becomes obligated to file
a report (or any amendment or supplement thereto) on Schedule 13D
or 14D-1 pursuant to the Exchange Act disclosing that such person
has become the beneficial owner of either (a) 50% or more of the
shares of Common Stock then outstanding or (b) securities
representing 50% or more of the combined voting power of the
Voting Stock (as defined below) of the Company then outstanding,
provided that a Change of Control shall not be deemed to have
occurred with respect to any transaction that constitutes a
Fundamental Change. An "Affiliate" of a specified person is a
person that directly or indirectly controls or is controlled by
or is under common control with, the person specified. An
"Associate" of a person means (i) any corporation or organization
other than the Company or any subsidiary of the Company, of which
the person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or estate in which the person
has a substantial beneficial interest or as to which the person
serves as trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of the person or any relative of the
spouse, who has the same home as the person or who is a director
or officer or the person or any of its parents or subsidiaries.
As used herein, a "Fundamental Change" with respect to the
Company means (a) the occurrence of any transaction or event in
connection with which all or substantially all of the Common
Stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive cash, securities,
property or other assets (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination,
reclassification or otherwise) or (b) the conveyance, sale,
lease, assignment, transfer or other disposal of all or
substantially all of the Company's property, business or assets;
provided, however that a Fundamental Change shall not be deemed
to have occurred with respect to either of the following
transactions or events: (i) any transaction or event in which
more than 50% (by value as determined in good faith by the Board
of Directors of the Company) of the consideration received by
holders of Common Stock consists of Marketable Stock (as defined
below) or (ii) any consolidation or merger of the Company in
which the holders of Common Stock immediately prior to such
transaction own, directly or indirectly, (1) 50% or more of the
common stock of the sole surviving corporation (or of the
ultimate parent of such sole surviving corporation) outstanding
at the time immediately after such consolidation or merger and
(2) securities representing 50% or more of the combined voting
power of the surviving corporation's Voting Stock (or the Voting
Stock of the ultimate parent of such surviving corporation)
outstanding at such time. The phrase "all or substantially all"
as used in this definition in reference to the Common Stock means
66% or more of the aggregate outstanding amount. Depending upon
the circumstances, there may be some uncertainty under Delaware
law as to whether a specific transaction constitutes a sale of
"all or substantially all" of the property, business or assets of
a company. This uncertainty may make it difficult for a holder to
determine whether or not a "Fundamental Change" has occurred, and
thus whether such holder is entitled to a special conversion
right in respect of the shares of Amended Series A Preferred
Stock held by such holder.
As used herein, "Voting Stock" means, with respect to any
person, capital stock of such person having general power under
ordinary circumstances to elect at least a majority of the board
of directors, managers or trustees of such persons (irrespective
of whether or not at the time capital stock or any other class or
classes shall have or might have voting power by reason of the
happening of any contingency).
As used herein , "Market Value" of the Common Stock or any
other Marketable Stock is the average of the last reported sales
prices of the Common Stock or such other Marketable Stock, as the
case may be, for the five business days ending on the last
business day preceding the date of the Fundamental Change or
Change of Control; provided, however, that if the Marketable
Stock is not traded on any national securities exchange or
similar quotation system as described in the definition of
"Marketable Stock" during such period, then the Market Value of
such Marketable Stock is the average of the last reported sales
prices per share of such Marketable Stock during the first five
business days commencing on the day after the date on which such
Marketable Stock was first distributed to the general public and
traded on the New York Stock Exchange ("NYSE"), the AMEX, the
NASDAQ NSM or any similar system of automated dissemination of
quotations of securities prices in the United States.
As used herein, "Marketable Stock" means Common Stock or
common stock of any corporation that is the successor (or the
ultimate parent of such successor) to all or substantially all of
the business or assets of the Company as a result of a
Fundamental Change, which is (or will, upon distribution thereof,
be) listed or quoted on the NYSE, the AMEX, the NASDAQ NSM or any
similar system of automated dissemination of quotations or
securities prices in the United States.
Liquidation Rights
------------------
In the event of any liquidation, dissolution or winding up
of the Company, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of the
Amended Series A Preferred Stock shall be entitled to receive,
out of the remaining net assets of the Company available for
distribution to stockholders, liquidating distributions in the
amount of $85.00 per share, plus an amount equal to all dividends
accrued and unpaid on each such share (whether or not declared)
to the date fixed for distribution, before any distribution is
made to holders of the Common Stock or any other class of stock
of the Company ranking junior to the Amended Series A Preferred
Stock. After receiving payment of the full amount of the
liquidating distribution to which they are entitled, the holders
of shares of Amended Series A Preferred Stock will not be
entitled to any further participation in any remaining assets of
the Company. If upon liquidation, dissolution or winding up of
the Company, the amounts payable with respect to the Amended
Series A Preferred Stock and any other capital stock ranking as
to such distribution on a parity with the Amended Series A
Preferred Stock with respect to such distributions ("Parity
Stock") are not paid in full, the holders of the Amended Series A
Preferred Stock and of such other Parity Stock will share ratably
in any such distribution of assets in proportion to the full
respective preferential amounts to which they are entitled.
Currently, the Series B Preferred Stock constitutes Parity Stock.
See "-- Description of Existing Capital Stock -- Preferred
Stock." Neither the consolidation or merger of the Company with
another corporation nor a sale, conveyance, lease, transfer or
exchange of all or substantially all of the Company's assets will
be considered a liquidation, dissolution or winding up of the
Company for these purposes.
Optional Redemption
-------------------
The Amended Series A Preferred Stock will not be redeemable
prior to May 1, 2002. On or after such date, the Amended Series A
Preferred Stock may be redeemed for cash, in whole or in part, at
the option of the Company at any time or from time to time, on
not less than 30 nor more than 60 days' notice, at the following
prices per share during the 12-month period beginning on May 1 of
the year indicated:
Year Redemption
---- Price
----------
2002 $90.00
2003 88.75
2004 87.50
2005 86.25
2006 and thereafter 85.00
together, in each case, with an amount equal to all dividends
(whether or not declared) accrued and unpaid to the date of
redemption.
If fewer than all the outstanding shares of Preferred Stock
are to be redeemed, the Company will select those to be redeemed
ratably or by lot in a manner determined by the Board of
Directors. All dividends upon the shares of Preferred Stock
called for redemption shall cease to accrue and all rights of the
holders thereof as shareholders of the Company (except the right
to receive the redemption price, including any accrued and unpaid
dividends to the date of redemption, without interest upon the
presentation of certificates representing the redeemed shares)
shall terminate on the date of redemption.
Mandatory Redemption
--------------------
The Amended Series A Preferred Stock will be mandatorily
redeemed, in whole, on May 1, 2007, upon not less than 30 nor
more than 60 days' notice, at a redemption price of $85.00 per
share, plus accrued and unpaid dividends (whether or not
declared) to the redemption date, payable in cash or, at the
election of the Company, in shares of Common Stock, valued at the
average of the Market Price over the 20 trading days preceding
the date of notice of redemption.
Voting Rights
-------------
In addition to any special voting rights granted by law and
the class voting rights described in the following two
paragraphs, the holders of Amended Series A Preferred Stock will
be entitled to vote with the holders of Common Stock on all
matters on which the holders of Common Stock are entitled to
vote. Further, each share of the Amended Series A Preferred
Stock will entitle the holder thereof to cast the same number of
votes as the full shares of Common Stock then issuable upon
conversion thereof.
Whenever dividends on the Amended Series A Preferred Stock
are in arrears in an amount equal to or exceeding three semi-
annual dividends (whether or not consecutive and whether payable
in cash or shares of Amended Series A Preferred Stock), the
number of directors of the Company will automatically be
increased by two and the holders of the Amended Series A
Preferred Stock (voting separately as a class) will be entitled
to elect the additional two directors until all dividends that
were accrued and unpaid have been paid or declared and funds or
shares, as the case may be, set aside to provide for payment in
full. Upon any termination of such rights to vote for directors,
the term of office of all directors so elected shall terminate.
Without the affirmative vote or consent of the holders of at
least two-thirds of the number of shares of Amended Series A
Preferred Stock then outstanding, the Company may not (a) create
or issue or increase the authorized number of shares of any class
or classes or series of stock ranking senior to the Amended
Series A Preferred Stock, either as to dividends or upon
liquidation, dissolution or winding up, or (b) alter, change or
repeal any of the powers, rights or preferences of the holders of
the Amended Series A Preferred Stock so as to affect adversely
such powers, preferences or rights of the Amended Series A
Preferred Stock. Accordingly, the voting rights of the holders of
Amended Series A Preferred Stock could, under certain
circumstances, operate to restrict the flexibility the Company
would otherwise have in connection with any future issuances of
equity securities or changes to its capital structure.
Miscellaneous
-------------
The Preferred Stock, when designated, issued and paid for,
will be fully paid and nonassessable. The Preferred Stock has no
preemptive rights and is not subject to any sinking fund.
Amended Series B Preferred Stock
- --------------------------------
On March 4, 1998, in connnection with settlement of
litigation instituted by the holder of the Company's Series B
Preferred Stock, the holder thereof sold its 44,465 shares of
Series B Preferred Stock and associated warrants. The
purchasers, in a simultaneous transaction exchanged the shares of
Series B Preferred Stock for Amended Series B Preferred Stock and
warrants to purchase 250,000 shares of Common Stock, subject to
adjustment. The Amended Series B Preferred Stock 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; has a liquidation preference of $100 per share plus
accumulated dividends and ranks senior to the Common Stock and
pari passu with the Amended Series A Preferred Stock with respect
to the payment of dividends and distributions on liquidation; is
convertible by the holders thereof at any time after the earlier
of the effective date of the registration under the Securities
Act of the conversion stock or August 31, 1998, at $4.75 if the
conversion stock has been registered or at $3.80 if the
conversion stock is unregistered; is redeemable at the option of
the holder at any time after December 20, 2001 at $100.00 per
share plus accrued and unpaid dividends, payable at the Company's
election in shares of Common Stock; and bears a fixed cumulative
dividend at an annual rate of $9.50 per share, payable semi-
annually in either cash, shares of Common Stock, or additional
shares of Amended Series B Preferred Stock, at the Company's
option.
Shares Eligible for Future Sale
- -------------------------------
As of March 31, 1998, there were reserved an aggregate of
(i) 2,679,601 shares of Common Stock subject to outstanding
options; (ii) 12,800,467 shares issuable upon conversion of the
Company's outstanding Amended Series A Preferred Stock; (iii)
17,361,286 shares issuable upon exercise of the Company's
outstanding warrants; (iv) 1,239,078 shares issuable upon
redemption of the Company's outstanding Amended Series B
Preferred Stock; (v) 104,375 shares reserved for sale to fund
working capital for the Company's China projects; (vi) 60,690
reserved for sale to fund general working capital requirements of
the Company; and (vii) 36,373 shares issuable in connection with
contractual obligations. The Company would receive a total of
approximately $86 million if all options and warrants were
exercised and all stock reserved for sale was sold at $5.06 per
share.
Additionally, the Company will have approximately 439
million shares of Common Stock available for issuance at such
times and upon such terms as may be approved by the Company's
Board of Directors. No prediction can be made as to the effect,
if any, that future sales or the availability of shares for sale
will have on the market price of the Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market could adversely
affect the prevailing market price of the Common Stock and could
impair the Company's ability to raise capital through sales of
its equity securities.
Approximately 6.5 million shares of Common Stock (including
shares issuable upon exercise of outstanding options and warrants
and conversion of convertible securities, the "Restricted
Shares") are held by executive officers and directors of the
Company and affiliates of the Company and may be sold pursuant to
an effective registration statement covering such shares or
pursuant to Rule 144 of the Securities Act, subject to the
restrictions described below.
In general, under Rule 144, as currently in effect, a person
(or persons whose shares are aggregated), including an affiliate,
who has beneficially owned Restricted Shares for a least one
year, is entitled to sell within any three-month period, a number
of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock or (ii) an
amount equal to the average weekly reported volume of trading in
such shares during the four calendar weeks preceding the date on
which notice of such sale is filed with the Commission. Sales
under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current
public information about the Company. Restricted Shares properly
sold in reliance on Rule 144 are thereafter freely tradable
without restrictions or registration under the Securities Act,
unless thereafter held by an affiliate of the Company. In
addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the one-
year holding period requirement, in order to sell shares of
Common Stock which are not Restricted Shares. As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or
indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such issuer. If
two years have elapsed since the later of the date of any
acquisition of Restricted Shares from the Company or from any
affiliate of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an affiliate of the Company at
any time during the three months preceding a sale, such person
would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations,
manner of sale restrictions, or public information or notice
requirements.
CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The following discussion is a summary of material federal
income tax considerations relevant to the purchase, ownership and
disposition of the Amended Series A Preferred Stock and the
Common Stock, but does not purport to be a complete analysis of
all the potential tax effects thereof. The discussion is based
upon the Internal Revenue Code of 1986 (the "Code"), Treasury
regulations, and Internal Revenue Service ("IRS") rulings and
judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative
action. No information is provided herein with respect to state
and local taxes or estate and gift tax considerations. This
information is directed to the original investors who hold the
Amended Series A Preferred Stock and the Common Stock as "capital
assets" within the meaning of Section 1221 of the Code. In
addition, this discussion does not address the tax consequences
to certain holders as to whom special rules apply (including life
insurance companies, tax exempt organizations, banks and dealers
in securities). The Company has not sought, nor does it intend
to seek, a ruling from the IRS that the tax consequences
described in the following discussion will be accepted by the
IRS. This discussion does not purport to address all federal
income tax aspects that may be relevant to holders in light of
their particular circumstances. Each prospective investor should
consult and should rely on his own tax advisor concerning the tax
consequences to him of the purchase, ownership and disposition of
the Amended Series A Preferred Stock and the Common Stock.
Taxation of the Amended Series A Preferred Stock and Common Stock
- -----------------------------------------------------------------
Dividends on Amended Series A Preferred Stock or Common Stock
-------------------------------------------------------------
Dividends paid on the Amended Series A Preferred Stock or
Common Stock will be taxable under Section 301 of the Code as
ordinary income to the extent of the Company's current and
accumulated "earnings and profits" (as defined in the Code).
Dividends received by corporate holders of the Amended Series A
Preferred Stock or Common Stock out of such earnings and profits
generally will qualify, subject to the limitations under Sections
246(c) and 246A of the Code, for the 70% dividends received
deduction allowable to corporations under Section 243 of the Code
(although the benefits of such deduction may be reduced or
eliminated by the corporate alternative minimum tax). Under
Section 246(c) of the Code, to be eligible for the dividends
received deduction, a corporate holder must hold its shares of
Amended Series A Preferred Stock or Common Stock for at least 46
days during the 90-day period beginning 45 days before the date
on which the shares became ex-dividend (91 days during the 180-
day period beginning 90 days before the shares became ex-dividend
in the case of a preferred dividend attributable to a period or
periods aggregating more than 366 days). A taxpayer's holding
period for these purposes is suspended during any period in which
the taxpayer has an option to sell, is under a contractual
obligation to sell, has made (and not closed) a short sale of, or
has granted an option to buy, substantially identical stock or
securities, or holds one or more other positions with respect to
substantially similar or related property that diminish the risk
of loss from holding such stock. Under Section 246A of the Code,
the dividends received deduction may be reduced or eliminated if
a holder's shares of Amended Series A Preferred Stock or Common
Stock are debt financed.
Section 1059 of the Code requires a corporate stockholder to
reduce its basis (but not below zero) in the Amended Series A
Preferred Stock or Common Stock by the nontaxed portion
(generally the portion eligible for the dividends received
deduction described above) of any "extraordinary dividend" if the
Amended Series A Preferred Stock or Common Stock has not been
held for more than two years before the date of announcement or
agreement with respect to such dividend. In addition, a
corporate holder of Amended Series A Preferred Stock or Common
Stock would recognize additional gain on the disposition of such
stock equal to any nontaxed portions of any extraordinary
dividend that would have reduced such holder's basis but for the
limitation on reducing basis below zero. An "extraordinary
dividend" generally is a dividend that (a) equals or exceeds 5%
in the case of preferred stock, or 10% in the case of common
stock, of the holder's adjusted basis in such stock, treating all
dividends having ex-dividend dates within a period of 85
consecutive days as one dividend or (b) exceeds 20 percent of the
holder's basis in such stock, treating all dividends having ex-
dividend dates within a period of 365 consecutive days as one
dividend, provided that in either case fair market value of the
stock on the day before the ex-dividend date, if it can be
established by the holder, may be substituted for the stock
basis. In addition, an amount treated as a dividend in the case
of a redemption of the Amended Series A Preferred Stock that is
either non-pro rata as to all stockholders or in partial
liquidation would also constitute an "extraordinary dividend"
without regard to the length of time the Amended Series A
Preferred Stock has been held. Special rules apply with respect
to a "qualified preferred dividend," which would include any
fixed dividend payable with respect to the Amended Series A
Preferred Stock, provided it is not in arrears as to dividends
when acquired and the actual rate of return on the Amended Series
A Preferred Stock does not exceed 15% calculated by reference to
the lower of the holder's basis in the Amended Series A Preferred
Stock or its liquidation preference. The extraordinary dividend
rules will not apply to a qualified preferred dividend if the
holder has held the Amended Series A Preferred Stock for more
than five years. If the holder disposes of the Amended Series A
Preferred Stock before it has been held for more than five years,
the aggregate reduction in basis will not exceed the excess of
the qualified preferred dividends paid during the period the
Amended Series A Preferred Stock was held by the holder over the
qualified preferred dividends which would have been paid during
such period on the basis of the Amended Series A Preferred
Stock's stated rate of return calculated by reference to the
lower of the holder's basis in the Amended Series A Preferred
Stock or its liquidation preference.
To the extent that a distribution on Amended Series A
Preferred Stock or Common Stock exceeds the current and
accumulated earnings and profits of the Company, such
distribution will be treated as a nontaxable return of capital
which reduces the holder's basis in its Amended Series A
Preferred Stock or Common Stock. Any such distribution in excess
of a holder's basis will be treated as short-term or long-term
capital gain, depending on whether the Amended Series A Preferred
Stock or Common Stock has been held for more than one year.
At the present time, the Company has no accumulated earnings
and profits for federal income tax purposes, and it is uncertain
whether and to what extent the Company will have current or
accumulated earnings and profits in the future. Accordingly,
there can be no assurance that distributions to corporate holders
of the Amended Series A Preferred Stock or Common Stock will
qualify for the dividends received deduction.
Redemption Premium on Amended Series A Preferred Stock
------------------------------------------------------
Under Section 305 of the Code and applicable Treasury
regulations, if the redemption price of redeemable preferred
stock exceeds its issue price and part (or all) of such excess is
considered an unreasonable redemption premium, the entire amount
of such excess is treated as distributed over the period during
which the preferred stock cannot be redeemed. The amount treated
as distributed each year would be determined on a constant yield
to maturity basis that would result in the allocation of a lesser
amount of distributions to the early years and a greater amount
to the later years of such period. Any such constructive
distribution would be classified as a dividend, a non-taxable
recovery of basis or an amount received in exchange for the
Amended Series A Preferred Stock pursuant to the rules summed up
under " -- Dividends on Amended Series A Preferred Stock or
Common Stock." Any such constructive distribution would be taken
into account for proposes of applying the extraordinary dividend
rules discussed above.
Under recently issued Treasury Regulations, a redemption
premium that would be paid in the event of an issuer call is
considered unreasonable only if, based on all the facts and
circumstances as of the issue date, redemption pursuant to the
call is more likely than not to occur. Even if a redemption is
considered more likely than not to occur, the redemption premium
is not subject to the current inclusion rule if it is solely in
the nature of a penalty for premature redemption. A redemption
premium is considered a penalty for premature redemption only if
it is paid as a result of changes in economic or market
conditions over which neither the issuer nor the holder has legal
or practical control.
Under a safe harbor, a redemption is not treated as more
likely than not to occur if (i) the issuer and holder are not
"related," (ii) there are no plans, arrangements, or agreements
that effectively require or are intended to compel the issuer to
redeem the stock (other than a mandatory redemption right
exercisable by the holder), and (iii) exercise of the call right
would not reduce the yield of the stock, as determined under
principles similar to the principles of section 1272(a) of the
Code and the Treasury Regulations under sections 1271 through
1275. The Company anticipates that any call of the Amended Series
A Preferred Stock will fall within this safe harbor, although no
assurance can be given that it will fall within the safe harbor.
Assuming that the redemption does not fall within the safe
harbor discussed above, the Company believes, based upon the
facts and circumstances existing at the time of issuance, that it
is not more likely than not that the redemption will occur. The
Company further believes that, even if the IRS were to treat the
redemption as more likely than not to occur, the redemption
premium should be considered a penalty paid for premature
redemption of the Amended Series A Preferred Stock.
Redemption or Sale of Amended Series A Preferred Stock
------------------------------------------------------
A redemption of Amended Series A Preferred Stock for cash
will be treated, under Section 302 of the Code, as (i) a
distribution treated as a taxable dividend, (ii) a nontaxable
recovery of basis, or (iii) an amount received in exchange for
the Amended Series A Preferred Stock pursuant to the rules
described under " -- Dividends on Amended Series A Preferred
Stock or Common Stock," unless the redemption (a) results in a
"complete termination" of the stockholder's interest in the
Company under Section 302(b)(3) of the Code; (b) is
"substantially disproportionate" with respect to the stockholder
under Section 302(b)(2) of the Code; or (c) is "not essentially
equivalent to a dividend" under Section 302(b)(1) of the Code. In
determining whether any of these tests have been met, shares
considered to be owned by the stockholder by reason of certain
constructive ownership rules in Sections 302(c) and 318(a) of the
Code, as well as shares actually owned, must be taken into
account. If any of these tests are met, the redemption of the
Amended Series A Preferred Stock for cash would be treated as a
sale or exchange for tax purposes.
A redemption will be "not essentially equivalent to a
dividend" as to a particular stockholder if it results in a
meaningful reduction in that stockholder's interest in the
Company. If, as a result of the redemption of the Amended Series
A Preferred Stock, a stockholder of the Company, whose relative
interest in the Company is minimal and who exercises no control
over corporate affairs, suffers a reduction in his proportionate
interest in the Company (taking into account shares
constructively owned by the stockholder and, in certain events,
dispositions of the stock that occur contemporaneously with the
redemption), that stockholder should be regarded as having
suffered a meaningful reduction in his interest in the Company.
If, under the foregoing rules, a redemption of Amended
Series A Preferred Stock is treated as a sale or exchange, rather
than as a distribution, or if the Amended Series A Preferred
Stock is sold, the holder would recognize taxable gain or loss
equal to the difference between the amount realized and the
holder's tax basis in the Amended Series A Preferred Stock. For
these purposes, the amount realized will generally be measured by
the amount of cash and the fair market value of any other
property received. The holder's initial cost basis in the Amended
Series A Preferred Stock will be that portion of the initial
Equity Unit price that is allocated to the Amended Series A
Preferred Stock based upon the relative fair market values of the
Amended Series A Preferred Stock and the Warrants. Each holder
should consult his tax adviser regarding the determination of the
initial cost basis of the Securities comprising the Units.
If a redemption of Amended Series A Preferred Stock is
treated as a distribution, the amount of the distribution will
generally be measured by the amount of cash and the fair market
value of any other property received. The stockholder's basis in
the redeemed Amended Series A Preferred Stock will be transferred
to any remaining stockholdings in the Company.
A distribution to a corporate stockholder in redemption of
Amended Series A Preferred Stock that is treated as a dividend
may also be considered an "extraordinary dividend" under Section
1059 of the Code. See " -- Dividends on Amended Series A
Preferred Stock or Common Stock." A redemption that is treated as
a dividend that is not pro rata as to all stockholders may be
treated as an extraordinary dividend without regard to the period
during which the stockholder held the Amended Series A Preferred
Stock.
Conversion of Amended Series A Preferred Stock Into Common
Stock
-----------------------------------------------------------
In general, no gain or loss will be recognized for federal
income tax purposes on conversion of Amended Series A Preferred
Stock solely into shares of Common Stock, except with respect to
any cash received in lieu of fractional shares of Common Stock.
If dividends on the Amended Series A Preferred Stock are in
arrears at the time of conversion, however, a portion of the
Common Stock received in exchange for Amended Series A Preferred
Stock could be viewed under Section 305(c) of the Code as a
distribution with respect to the Amended Series A Preferred
Stock, taxable as a dividend. The tax basis for Common Stock
received on conversion will be equal to the tax basis of the
Amended Series A Preferred Stock converted, reduced by the
portion of basis allocable to any fractional share exchanged for
cash. The holding period of the shares of Common Stock will
include the holding period of such Amended Series A Preferred
Stock.
Adjustment of Conversion Price
------------------------------
Section 305 of the Code treats holders of convertible
securities as having received a constructive distribution
(taxable as a dividend to the extent of the issuing corporation's
current or accumulated earnings and profits) when certain
adjustments are made to the conversion price and conversion ratio
of such securities. For example, a constructive distribution
results when the conversion price is adjusted to reflect certain
taxable distributions with respect to the stock into which
preferred stock is convertible. Adjustment of the Conversion
Price and the Conversion Ratio at which the Amended Series A
Preferred Stock can be converted (which may occur under certain
circumstances) could cause the holders thereof to be viewed under
Section 305 of the Code as having received a deemed distribution
taxable as a dividend whether or not such holders exercise their
conversion rights.
Foreign Holders
- ---------------
The following discussion is a summary of certain United
States federal income tax consequences to a Foreign Person that
holds a Security. The term "Foreign Person" means a nonresident
alien individual or foreign corporation, but only if the income
or gain on the Security is not "effectively connected with the
conduct of a trade or business within the United States." If the
income or gain on the Security is "effectively connected with the
conduct of a trade or business within the United States," then
the nonresident alien individual or foreign corporation will be
subject to tax on such income or gain in essentially the same
manner as a United States citizen or resident or a domestic
corporation, as discussed herein, and in the case of a foreign
corporation, may also be subject to the branch profits tax.
In general, gain (to the extent it is not "effectively
connected with the conduct of a trade or business within the
United States") recognized by a Foreign Person upon the
redemption, sale, exchange or other taxable disposition of a
share of Amended Series A Preferred Stock or of shares of Common
Stock will not be subject to United States federal income tax
unless such Foreign Person is an individual present in the United
States for 183 days or more during the taxable year in which the
disposition occurs and certain other requirements are met, or
unless the Company was a United States real property holding
corporation at any time during the five years preceding the
disposition while the Foreign Person held an interest in the
Company. Although the Company has previously been treated as a
United States real property holding corporation for United States
federal income tax purposes because of its ownership of
substantial real estate assets in the United States, the Company
believes that it is not presently a United States real property
holding corporation because the fair market value of its United
States real property interests now constitutes less than 50% of
the total fair market value of its real estate assets, including
its Chinese assets. If the Company were again to become a United
States real property holding corporation in the future, either
because of a change in the fair market values of its current
properties or through acquisitions of real property interests, a
Foreign Person who holds Amended Series A Preferred Stock or
Common Stock would generally be subject to United States federal
income tax on any gain recognized from sale or other disposition
of Amended Series A Preferred Stock or Common Stock, unless the
Common Stock is traded on an established securities market and a
Foreign Person does not directly or constructively own Amended
Series A Preferred Stock or Common Stock with a fair market value
on the date of acquisition of more than 5% of the fair market
value of the outstanding Common Stock on such date. If subject to
United States federal income tax, the gain would be treated as
effectively connected with the conduct of a trade or business
within the United States and the sale or other disposition
generally would be subject to withholding tax equal to 10% of the
amount realized therefrom.
Distributions paid on the Amended Series A Preferred Stock
or Common Stock to a Foreign Person (other than distributions
that constitute income effectively connected with a United States
trade or business) will be subject to United States federal
income tax withholding at a rate of 30% of the amount of the
distribution (unless the rate is reduced by an applicable tax
treaty). If the Company derives at least 80% of its gross income
from the active conduct of a trade or business outside the United
States for a period of three years prior to the taxable year of
the distribution (or for the taxable year of the distribution if
the Company has no gross income for such three-year period), then
distributions to Foreign Holders of Amended Series A Preferred
Stock or Common Stock will not be subject to withholding.
Any Foreign Person that recognizes gain upon the redemption,
sale, exchange or other taxable disposition of a share of Amended
Series A Preferred Stock or of shares of Common Stock or receives
a dividend on the Common Stock that is "effectively connected
with the conduct of a trade or business with the United States"
will be subject to tax in essentially the same manner as a U.S.
person, as discussed above. A Foreign Person that is a foreign
corporation engaged in a U.S. trade or business also may be
subject to the branch profits tax with respect to such gain or
dividend.
Backup Withholding
- ------------------
A noncorporate holder may be subject, under certain
circumstances, to backup withholding at a 31% rate with respect
to payments received with respect to the Amended Series A
Preferred Stock and the Common Stock. This withholding generally
applies only if the holder (i) fails to furnish his, her or its
social security or other taxpayer identification number ("TIN"),
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that he, she or it has failed to report properly payments of
interest and dividends and the IRS has notified the Company that
he, she or it is subject to backup withholding, or (iv) fails,
under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his,
her or its correct number and that he, she or it is not subject
to backup withholding. Any amount withheld from a payment to a
holder under the backup withholding rules is allowable as a
credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and
foreign individuals who comply with certain certification
requirements) are not subject to backup withholding. Holders
should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining
such an exemption.
SELLING SECURITY HOLDERS
An aggregate of up to 1,163,115 shares of Amended Series A
Preferred Stock may be offered by certain Selling Security
Holders. As of May [o], 1998, the Selling Security Holders, none
of whom has a material relationship with the Company or any of
its predecessors or affiliates except as set forth herein, were
as follows:
<TABLE>
<CAPTION>
Shares of Amended Series
Shares of Amended Series A Maximum Number A Preferred Stock
Preferred Stock Beneficially of Shares to be Beneficially Owned After
Name of Selling Security Holder Owned Prior to the Offering Sold in the Offering The Offering
- ------------------------------- --------------------------- -------------------- ------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Arbco Associates, L.P.
Opportunity Associates, L.P.
Offense Group Associates, L.P.
Kayne Anderson Non-Traditional
Investments, L.P.
Evanston Insurance Company
Foremost Insurance Company
Nobel Insurance Company
Topa Insurance Company
Cumberland Partners, L.P.
Less than 1% holders
Total 1,163,115
</TABLE>
An aggregate of up to 32,950,698 of Common Stock may be
offered by certain Selling Security Holders. As of May [o],1998,
the Selling Security Holders, none of whom has a material
relationship with the Company or any of its predecessors or
affiliates except as set forth herein, were as follows:
<TABLE>
<CAPTION>
Shares of Common Stock Maximum Number Shares of Common Stock
Beneficially Owned of Shares to be Beneficially Owned
Name of Selling Security Holder Prior to the Offering Sold in the Offering After the Offering
- ------------------------------ --------------------- -------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Arbco Associates, L.P.
Opportunity Associates, L.P.
Offense Group Associates, L.P.
Kayne Anderson Non-Traditional
Investments, L.P. and
affiliates as listed below
Evanston Insurance Company
Foremost Insurance Company
Nobel Insurance Company
Topa Insurance Company
Cumberland Partners, L.P.
Providence Capital Ltd.
William Wang
Mitch Leigh
Abby Leigh
Arthur Rosenbloom
Longhorn Partners
Target Trust
Rebecca Leigh Trust
David Leigh Trust
Steven Gottlieb
Tushar Ramani
Ron Savarese
Rauscher Pierce & Clark
Terrenex Acquisitions Corp.
Donald & Joanne Westerberg
Jerald T. Hanchey
Dornbush Family Limited Partnership
Guinness Mahon Investments
Foundation of J. Edgar Monroe/ Boland Manufacturing
Con-Spec, Inc.
Patrick B. Collins
Total 32,950,698
</TABLE>
The Securities may be sold from time to time by the Selling
Security Holders, or by pledges, donees, transferrees or other
successors in interest. Such sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at
prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. The
Securities may be sold by one or more of the following: (a) a
block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction (b)
purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this Prospectus; (c) an
exchange distribution in accordance with the rules of such
exchange; and (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In
effecting sales, broker-dealers engaged by the selling
shareholders may arrange for other broker-dealers to participate
in the resales.
In connection with distributions of the Securities or
otherwise, the Selling Security Holders may enter into hedging
transaction with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of the
shares registered hereunder in the course of hedging the
positions they assume with Selling Security Holders. The Selling
Security Holders may also sell shares short and redeliver the
shares to close out such short positions. The Selling Security
Holders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of
the Securities registered hereunder, which the broker-dealer may
resell or otherwise transfer pursuant to this Prospectus. The
Selling Security Holders may also loan or pledge the Securities
registered hereunder to a broker-dealer and the broker-dealer may
sell the Securities so loaned or upon a default the broker-dealer
may effect sales of the pledged Securities pursuant to this
Prospectus.
Broker-dealers or agents may receive compensation in the
form of commissions, discounts or concessions from Selling
Security Holders in amounts to be negotiated in connection with
the sale. Such broker-dealers and any other participating broker-
dealers may be deemed to be "underwriters" within the meaning of
the Securities Act, in connection with such sales and any such
commission, discount or concession may be deemed to be
underwriting discounts or commissions under the Securities Act.
In addition, any Securities covered by this Prospectus which
qualify for sale pursuant to Rules 144, 144A or 904 may be sold
under such Rules rather than pursuant to this Prospectus.
All costs, expenses and fees in connection with the
registration of the Securities will be borne by the Company.
Commissions and discounts, if any, attributable to the sales of
the Securities will be borne by the Selling Security Holders.
The Selling Security Holders may agree to indemnify any broker-
dealer or agent that participates in transactions involving sales
of the Securities against certain liabilities, including
liabilities arising under the Securities Act. The Company and
certain of the Security Holders have agreed to indemnify certain
persons including broker-dealers or agents against certain
liabilities in connection with the offering of the Securities,
including liabilities arising under the Securities Act.
On May 20, 1997, the Company entered into two Registration
Rights Agreements (collectively, the "Registration Agreements")
with Jefferies as the initial purchaser in the Offerings.
Pursuant to the Registration Agreements, the initial purchaser
and all subsequent holders of Amended Series A Preferred Stock
and Equity Warrants issued in the Offerings were granted certain
registration rights with respect to the Amended Series A
Preferred Stock and the Common Stock issuable upon conversion of
the Amended Series A Preferred Stock.
In addition, the Company is registering certain outstanding
shares of Common Stock previously issued in certain private
placements, as well as Common Stock issuable on exercise of
certain outstanding warrants, pursuant to certain "piggy back"
registration covenants and other contractual agreements to which
the Company is subject.
Pursuant to such Registration Agreements and other
contractual arrangements, the Company has agreed to indemnify the
Selling Security Holders against certain liabilities, including
liabilities under the Securities Act.
The Company is registering the Securities at its expense
including paying all filing, printing, legal and accounting fees
in connection therewith; provided, however, the Selling Security
Holders will pay all applicable stock transfer taxes, brokerage
commissions or other transaction charges and expenses.
Jefferies has performed and may in the future perform
various investment banking services for the Company.
LEGAL MATTERS
Certain legal matters with respect to the Securities will
be passed upon for the Company by Satterlee Stephens Burke &
Burke LLP, New York, NY.
EXPERTS
The consolidated financial statements of the Company and XCL-
China Ltd. as of December 31, 1997 and 1996 and for the three
years in the period ended December 31, 1997 included in this
Prospectus have been included herein in reliance on the reports,
both of which include an explanatory paragraph regarding the
Company's ability to continue as a going concern, of Coopers &
Lybrand L.L.P., independent accountants, given the authority of
that firm as experts in accounting and auditing.
ENGINEERS
The estimate of the oil and gas reserves as of January 1,
1998, for the Company's interests in the Zhao Dong Block as
prepared by H.J. Gruy and Associates, Inc. included in this
Prospectus has been included herein in reliance upon the
authority of such firm as experts with respect to the matters
contained in such firm's report attached hereto as Appendix A.
GLOSSARY OF TERMS
Unless otherwise indicated in this Prospectus, natural gas
volumes are stated at the legal pressure base of the State or
area in which the reserves are located at 60 degrees Fahrenheit.
Natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one barrel of crude oil, condensate or NGLs.
The following definitions shall apply to the technical terms
used in this Prospectus.
"Bbl" means barrel or barrels.
"Bcf" means billion cubic feet.
"BOE" means barrel of crude oil equivalent.
"BOPD" means barrel per day.
"DD&A" means depletion, depreciation and amortization.
"Developed acreage" means acreage which consists of
acres spaced or assignable to productive wells.
"Developed well" means a well drilled within the proved
area of a crude oil or natural gas reservoir to the depth of
stratigraphic horizon (rock layer or formation) known to be
productive for the purpose of extraction of proved crude oil
or natural gas reserves.
"Dry hole" means an exploratory or development well
found to be incapable of producing either crude oil or gas
in sufficient quantities to justify completion as a crude
oil or natural gas well.
"EBITDA" means earnings from continuing operations
before income taxes, interest expense, DD&A and other non-
cash charges.
"Exploratory well" means a well drilled to find and
produce crude oil or natural gas in an unproved area, to
find a new reservoir in a field previously found to be
producing crude oil or natural gas in another reservoir, or
to extend a known reservoir.
"Farmout" means a leasehold held by the owner thereof
under an agreement between operators, whereby a lease owner
not desirous of drilling at the time agrees to assign the
lease, or some portion of it (in common or in severalty) to
another operator who is desirous of drilling the tract.
"Finding cost", expressed in dollars per BOE, is
calculated by dividing the amount of total exploration and
development capital expenditures (excluding any amortization
with respect to deferred financing fees) by the amount of
proved reserves added during the same period (including
the effect on proved reserves of reserve revisions).
"G&A" means general and administrative.
"Gross" natural gas and crude oil wells or "gross"
wells or acres is the number of wells or acres in which the
Company has an interest.
"LOE" means lease operating expenses and production
taxes.
"MBbl" means thousand barrels.
"MBOE" means thousand barrels of crude oil equivalent.
"Mcf" means thousand cubic feet.
"Mcfpd" means thousand cubic feet per day.
"MMBbls" means million barrels of crude oil.
"MMBOE" means million barrels of crude oil equivalent.
"MMBTU" means million British Thermal Units.
"MMcf" means million cubic feet.
"MMcfpd" means million cubic feet per day.
"Net" natural gas and crude oil wells or "net" acres
are determined by multiplying "gross" wells or acres by the
Company's working interest in such wells or acres.
"NGL" means natural gas liquid.
"PV-10" means estimated future net revenue, discounted
at a rate of 10% per annum, before income taxes and with no
price or cost escalation or de-escalation in accordance with
guidelines promulgated by the Commission.
"Production costs" means lease operating expenses and
taxes on natural gas and crude oil production.
"Productive wells" means producing wells and wells
capable of production.
"Proved developed reserves" includes only those proved
reserves expected to be recovered from existing completion
intervals in existing wells and those reserves that exist
behind the casing of existing wells when the cost of making
such reserves available for production is relatively small
compared to the cost of a new well.
"Proved reserves" or "reserves" means natural gas and
crude oil, condensate and NGLs on a net revenue interest
basis, found to be commercially recoverable.
"Service well" is a well used for water injection in
secondary recovery projects or for the disposal of produced
water.
"Undeveloped acreage" means leased acres on which wells
have not been drilled or completed to a point that would
permit the production of commercial quantities of crude oil
and natural gas, regardless whether or not such acreage
contains proved reserves.
INDEX TO FINANCIAL STATEMENTS
Page
XCL Ltd.
- --------
Report of Independent Accountants............................ F-2
Consolidated Balance Sheet as of December 31, 1997 and
December 31, 1996........................................... F-3
Consolidated Statement of Operations for each of the three
years in the period ended December 31, 1997................ F-4
Consolidated Statement of Shareholders' Equity for each of
the three years in the period ended December 31, 1997...... F-5
Consolidated Statement of Cash Flows for each of the three
years in the period ended December 31, 1997................. F-6
Notes to Consolidated Financial Statements................... F-7
Supplemental Information..................................... F-23
Schedule II - Valuation and Qualifying Accounts.............. F-28
XCL-China Ltd.
- --------------
Report of Independent Accountants............................ F-29
Balance Sheet as of December 31, 1997 and December 31, 1996.. F-30
Statement of Operations for each of the three years in the
period ended December 31, 1997.............................. F-31
Statement of Shareholders' Deficit for each of the three
years in the period ended December 31, 1997................. F-32
Statement of Cash Flows for each of the three years in the
period ended December 31, 1997.............................. F-33
Notes to Financial Statements................................ F-34
Supplemental Information..................................... F-38
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. and Subsidiaries listed
in the Index on page F-1. These consolidated financial
statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
and financial statement schedule 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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 consolidated financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company is generating minimal revenues and
although the Company has cash (including its restricted cash) in
the amount of approximately $32 million as of December 31, 1997,
and a positive working capital position, it must generate
additional cash flows to satisfy its development and exploratory
obligations with respect to its China properties. There is no
assurance that the Company will be able to generate the necessary
funds to satisfy these contractual obligations and to ultimately
achieve profitable operations, which creates doubt about its
ability to continue as a going concern. Managements' plans in
regard to these matters are described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1998
XCL Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31
------------------
A S S E T S 1997 1996
----------- ---- ----
Current assets:
Cash and cash equivalents $ 21,952 $ 113
Cash held in escrow (restricted) 10,263 --
Accounts receivable, net 101 23
Refundable deposits 1,200 --
Other 451 212
------ ----
Total current assets 33,967 348
------ ----
Property and equipment:
Oil and gas (full cost method):
Proved properties under development
not being amortized 21,172 13,571
Unevaluated properties 33,132 21,238
------ ------
54,304 34,809
Land, at cost -- 135
Other 1,163 2,492
------ ------
55,467 37,436
Accumulated depreciation, depletion
and amortization (1,000) (1,491)
------ ------
54,467 35,945
------ ------
Investments 4,173 2,383
Assets held for sale 21,155 21,058
Debt issue costs, less amortization 4,268 950
Other assets 1,059 180
------- -------
Total assets $ 119,089 $ 60,864
======= =======
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- --------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued costs $ 2,727 $ 3,901
Due to joint venture partner 4,504 4,202
Dividends payable 1,813 928
Current maturities of long term debt 2,524 38,022
------- ------
Total current liabilities 11,568 47,053
------- ------
Long-term debt, net of current maturities 61,310 --
Other non-current liabilities 5,386 2,770
Commitments and contingencies (Notes 2 and 11)
Shareholders' equity:
Preferred stock-$1.00 par value;
authorized 2.4 million
shares at December 31, 1997
and 1996; issued shares of
1,196,236 at December 31,
1997 and 669,411 at
December 31, 1996 - liquidation
preference of $103 million at
December 31, 1997 1,196 669
Common stock-$.01 par value;
authorized 500 million shares
at December 31, 1997 and 1996;
issued shares of 21,710,257 at
December 31, 1997 and 285,754,151
at December 31,1996 217 2,858
Common stock held in treasury -
$.01 par value; 69,470
shares at December 31, 1997
and 1,042,065 shares at
December 31, 1996 (1) (10)
Unearned compensation (12,021) --
Additional paid-in capital 298,588 226,956
Accumulated deficit (247,154) (219,432)
------- -------
Total shareholders' equity 40,825 11,041
------- -------
Total liabilities and
shareholders' equity $ 119,089 $ 60,864
======== ======
The accompanying notes are an integral part of these financial statements.
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Oil and gas revenues from properties held for sale $ 236 $ 1,136 $ 2,480
------- ------- -------
Costs and operating expenses:
Operating 210 342 985
Depreciation, depletion and amortization 126 579 2,266
Provision for impairment of oil and gas properties -- 3,850 75,300
Writedown of other assets and investments -- 2,444 4,461
General and administrative costs 4,910 3,487 4,551
Other 3,048 227 590
------- ------ -------
8,294 10,929 88,153
------- ------ -------
Operating loss (8,058) (9,793) (85,673)
------- ------ -------
Other income (expense):
Interest expense, net of amounts capitalized (8,450) (2,415) (2,998)
Gain (loss) on sale of investments/assets -- (661) 613
Interest income 2,212 8 133
Other, net 853 787 88
------- ------ -------
(5,385) (2,281) (2,164)
------- ------ -------
Loss before extraordinary item (13,443) (12,074) (87,837)
Extraordinary charge for early extinguishment of debt (551) -- --
------ ------- ------
Net loss (13,994) (12,074) (87,837)
Preferred stock dividends (13,728) (5,356) (4,821)
------ ------ ------
Net loss attributable to common stock $(27,722) $(17,430) $(92,658)
====== ====== ======
Loss per share (basic):
Net loss before extraordinary item $ (1.33) $ (.98) $ (5.77)
Extraordinary item (.03) -- --
------- ------ -------
Net loss per share $ (1.36) $ (.98) $ (5.77)
======= ======= =======
Loss per share (diluted):
Net loss before extraordinary item $ (1.33) $ (.98) $ (5.77)
Extraordinary item (.03) -- --
------- ------ -------
Net loss per share $ (1.36) $ (.98) $ (5.77)
======= ====== ======
Average number of shares used in per share computations:
Basic 20,451 17,705 16,047
Diluted 20,451 17,705 16,047
</TABLE>
The accompanying notes are an integral part of these financial statements.
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Thousands of Dollars)
<TABLE>
<CAPTION>
Total
Preferred Common Treasury Paid-In Accumulated Unearned Shareholders'
Stock Stock Stock Capital Deficit Compensation Equity
--------- ------ -------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 649 2,372 (35) 206,241 (114,027) -- 95,200
Net loss -- -- -- -- (87,837) -- (87,837)
Dividends -- -- -- -- (4,821) -- (4,821)
Preferred shares issued 32 -- -- 5,092 -- -- 5,124
Preferred shares subscribed 4 -- -- -- -- -- 4
Common shares issued -- 189 -- 7,936 -- -- 8,125
Treasury shares purchased -- -- (25) (1,232) -- -- (1,257)
Treasury shares issued -- -- 35 2,327 -- -- 2,362
----- ------ ----- ------- ------- ------ -------
Balance, December 31, 1995 685 2,561 (25) 220,364 (206,685) -- 16,900
Net loss -- -- -- -- (12,074) -- (12,074)
Dividends -- -- -- -- (673) -- (673)
Preferred shares issued 10 -- -- 128 -- -- 138
Preferred shares subscribed (4) -- -- -- -- -- (4)
Preferred shares converted
to common shares (22) 5 -- 17 -- -- --
Common shares issued -- 292 -- 6,339 -- -- 6,631
Treasury shares purchased -- -- (3) (138) -- -- (141)
Treasury shares issued -- -- 18 246 -- -- 264
----- ------ ---- -------- ------- ------ -------
Balance, December 31, 1996 669 2,858 (10) 226,956 (219,432) -- 11,041
Net loss -- -- -- -- (13,994) -- (13,994)
Dividends -- -- -- -- (13,728) -- (13,728)
Preferred shares issued 507 -- -- 36,521 -- -- 37,028
Common shares issued -- 198 -- 4,395 -- -- 4,593
Issuance of stock purchase
warrants -- -- -- 15,032 -- -- 15,032
Unearned compensation 20 13 -- 12,841 -- (12,021) 853
Reverse stock split 1 for 15 -- (2,852) 9 2,843 -- -- --
----- ------ ----- ------- ------- ------ -------
Balance, December 31, 1997 $1,196 $ 217 $ (1) 298,588 $(247,154) $(12,021) $ 40,825
===== ====== ===== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (13,994) $ (12,074) $ (87,837)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization 126 579 2,266
Provision for impairment of oil and gas properties -- 3,850 75,300
Extraordinary charge for early extinguishment of debt 551 -- --
(Gain) loss on sale of investments/assets -- 661 (613)
Amortization of discount on senior secured notes 1,342 -- --
Writedown of other assets and investments -- 2,444 4,461
Stock compensation programs 853 -- --
Other 796 -- --
Change in assets and liabilities:
Accounts receivable (78) 799 875
Refundable deposits (1,200) -- --
Accounts payable and accrued costs (132) 575 (765)
Non-current liabilities and other 2,655 12 803
------- ------ -------
Total adjustments 4,913 8,920 82,327
------- ------ -------
Net cash used in operating activities (9,081) (3,154) (5,510)
------- ------ -------
Cash flows from investing activities:
Capital expenditures (16,097) (1,489) (8,458)
Investments (1,790) (491) (1,624)
Proceeds from sales of assets and investments 797 9,210 2,655
Other -- 4 64
------ ------ -----
Net cash (used in) provided by investing
activities (17,090) 7,234 (7,363)
------ ----- ------
Cash flows from financing activities:
Proceeds from sales of common stock 652 1,766 3,553
Proceeds from issuance of preferred stock 25,000 144 3,068
Proceeds from sale of treasury stock -- 264 2,487
Proceeds from Senior Secured Notes 75,000 -- --
Loan proceeds 6,100 315 -
Payment of long-term debt (35,503) (8,344) (522)
Payment of notes payable (6,100) -- --
Proceeds from exercise of options and warrants 1,590 691 874
Payment of preferred stock dividends -- -- (250)
Payment for treasury stock -- (141) (1,257)
Stock/note issuance costs and other (8,466) (272) (221)
------- ----- -----
Net cash provided by (used in) financing
activities 58,273 (5,577) 7,732
------- ------ -----
Net increase (decrease) in cash and cash equivalents 32,102 (1,497) (5,141)
Cash and cash equivalents at beginning of year 113 1,610 6,751
------- ------ ------
Cash and cash equivalents at end of year $ 32,215 $ 113 $ 1,610
======= ====== ======
Supplemental information:
Cash paid for interest, net of amounts capitalized $ 7,441 $ 1,591 $ 2,602
======= ====== ======
</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. Certain reclassifications have been
made to prior year financial statements to conform to current
year presentation. These reclassifications had no effect on net
loss, cash flows or shareholders' equity.
Use of Estimates in the Preparation of Financial Statements:
The preparation of the Company's financial statements, in
conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues and expenses,
and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers deposits which can be redeemed on
demand and investments which have original maturities of less
than three months, when purchased, to be cash equivalents. As of
December 31, 1997, the Company's cash and cash equivalents were
deposited primarily in three financial institutions.
Concentration of Credit Risk:
The Company operates exclusively in the oil and gas industry
and receivables are due from other producers who may be affected
by economic conditions in the industry. The Company has not
experienced any material credit losses.
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. As of December 31, 1997, the Company
had cash in financial institutions in excess of the insured
amounts.
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 the
fair value of long-term debt approximates carrying value. Fair
value of such financial instruments is not necessarily
representative of the amount that could be realized or settled.
Oil and Gas Properties:
The Company accounts for its oil and gas exploration and
production activities using the full cost method of accounting.
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.
The 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 domestic oil and gas
reserves were estimated by Company engineers in 1997 and 1996,
and foreign reserves in 1997 and 1996 by independent petroleum
engineers. 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.
During the fourth quarter of 1995, the Company decided to
concentrate on the development of its China investments, and
decided to dispose of its domestic properties. Accordingly, the
recorded value of the Company's domestic properties was reduced
to their estimated fair market value and the resulting balances
were transferred to assets held for sale.
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 percent, 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 depreciation, depletion and amortization expense
("DD&A") in the period in which it occurs.
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, financial condition or cash flows. 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 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 15 years.
Capitalized Interest and Amortized Debt Costs:
During fiscal 1997, 1996 and 1995, interest and associated
costs of approximately $5.8 million, $2.8 million and $3.1
million, respectively were capitalized on significant investments
in oil and gas properties that are not being currently
depreciated, depleted, or amortized and on which exploration or
development activities are in progress. Deferred debt issue
costs and discount on senior secured notes are amortized on the
straight-line basis
over the term of the related debt agreement. The discount on
senior secured notes is the amount attributable to the detachable
Common Stock purchase warrants.
Income Taxes:
The Company accounts for income taxes in compliance 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.
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.
Foreign Operations
The Company's future operations and earnings will depend
upon the results of the Company's operations in China. There can
be no assurance that the Company will be able to successfully
conduct such operations, and a failure to do so would have a
material adverse effect on the Company's financial position,
results of operations and cash flows. Also, the success of the
Company's operations will be subject to numerous contingencies,
some of which are beyond management's control. These
contingencies include general and regional economic conditions,
prices for crude oil and natural gas, competition and changes in
regulation. Since the Company is dependent on international
operations, specifically those in China, the Company will be
subject to various additional political, economic and other
uncertainties. Among other risks, the Company's operations will
be subject to the risks of restrictions on transfer of funds;
export duties, quotas and embargoes; domestic and international
customs and tariffs; and changing taxation policies, foreign
exchange restrictions, political conditions and governmental
regulations.
Stock Based Compensation:
Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," ("SFAS No. 123")
encourages, but does not require companies to record compensation
costs for stock-based compensation plans at fair value. The
Company has chosen to continue to account for stock-based
employee compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation cost for
stock options, awards and warrants is measured as the excess, if
any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire
the stock.
Earnings Per Share:
During 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.
128") and has restated all years presented in accordance
therewith. SFAS No. 128 requires a dual presentation of basic
and diluted earnings per share ("EPS") on the face of the
statement of operations. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number
of common shares for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
would then share in earnings.
Environmental Expenditures
Environmental expenditures relating to current operations
are expensed or capitalized, as appropriate, depending on whether
such expenditures provide future economic benefits. Liabilities
are recognized when the expenditures are considered probable and
can be reasonably estimated. Measurement of liabilities is based
on currently enacted laws and regulations, existing technology
and undiscounted site-specific costs. Generally, such
recognition coincides with the Company's commitment to a formal
plan of action.
Common Stock Reverse Split
Effective December 17, 1997, the Company amended and
restated its Certificate of Incorporation to effect a one-for-
fifteen reverse split of the Company's Common Stock. All share
amounts presented herein have been adjusted to reflect the
reverse split.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's year
ending December 31, 1998. SFAS No. 130 establishes standards for
the reporting and displaying of comprehensive income and its
components. The Company will be analyzing SFAS No. 130 during
1998 to determine what, if any, additional disclosures will be
required.
In June 1997, the FASB Issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which
is effective the Company's year ended December 31, 1998. This
statement establishes standards for reporting of information
about operating segments. The Company will be analyzing SFAS No.
131 during 1998 to determine what, if any, additional disclosures
will be required.
(2) Liquidity and Management's Plan
The Company, in connection with its 1995 decision to dispose
of its domestic properties, is generating minimal annual revenues
and is devoting all of its efforts toward the development of its
China properties. Although the Company has cash available in the
amount of approximately $32 million as of December 31, 1997
(including restricted cash of approximately $10 million) and a
positive working capital position, management anticipates that
additional funds will be needed to meet all of its development
and exploratory obligations until sufficient cash flows are
generated from anticipated production to sustain its operations
and to fund future development and exploration obligations.
Management plans to generate the additional cash needed
through the sale or financing of its domestic assets held for
sale and the completion of additional equity, debt or joint
venture transactions. There is no assurance, however, that the
Company will be able to sell or finance its assets held for sale
or to complete other transactions in the future at commercially
reasonable terms, if at all, or that it will be able to meet its
future contractual obligations. If production from the China
properties commences in late 1998 or the first half of 1999, as
anticipated, the Company's proportionate share of the related
cash flow will be available to help satisfy cash requirements.
However, there is likewise no assurance that such development
will be successful and production will commence, and that such
cash flow will be available.
(3) Supplemental Cash Flow Information
There were no income taxes paid for the years ended December
31, 1997, 1996 and 1995.
The Company completed the following noncash transactions in
1997 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:
1997
----
On January 9, 1997, the Company accepted subscriptions for
an aggregate of 21,057 shares of Series F Preferred Stock, issued
in February to three individuals for 18,448 shares; 1,731 shares
and 878 shares, respectively, at $65.00/share, in exchange for
$225,000 in cash, cancellation of a consulting agreement,
surrender of Common Stock and Warrants issued in connection with
a consulting agreement, surrender of rights to acquire units of
registered Common Stock and Warrants, surrender of certain
registration rights covering 3,000,000 shares; and surrender of
certain shares of Common Stock and Warrants issued in connection
with compensation for past fundraising activities, surrender of
rights to acquire units of registered Common Stock and Warrants
and certain registration rights covering 75,000 shares.
On May 20, 1997, the Company issued 11,816 shares of Amended
Series A Preferred Stock and 133,914 warrants to acquire shares
of Common Stock, in respect of approximately $1.0 million of
accrued interest payable to those institutional holders of
Secured Subordinated Debt who purchased $8 million of Amended
Series A Preferred Stock. The shares of Amended Series A
Preferred Stock were valued at $85.00 per share. The warrants
issued are first exercisable on May 20, 1998, at an exercise
price of $3.0945 per share, and expire on November 1, 2000.
In October, 1997, the Company issued 30,000 shares of Common
Stock and granted .003215% in aggregate Net Revenue Interest on
the Zhao Dong Block to, a former employee of the Company, and her
attorneys in settlement of litigation against the Company.
In October 1997, pursuant to an agreement effective October
1, 1997, the Company issued an aggregate of 53,333 shares of
Common Stock as compensation to a resident of Taiwan who has
performed services for the Company.
On November 11, 1997, the Company issued 26,667 shares of
Common Stock and stock purchase warrants to acquire 13,333 shares
of Common Stock to a consultant, as compensation pursuant to an
agreement dated effective as of February 20, 1997.
1996
----
In March and April 1996, the Company sold units of Common
Stock and Warrants through a placement agent in a Regulation S
unit offering. As compensation for such unit offering the
Company granted warrants to acquire an aggregate of 25,600 shares
of Common Stock.
As compensation for services performed resulting in Apache
Corp. purchasing an additional interest in the Zhao Dong Block,
during the first quarter the Company issued 3,333 shares of
Common Stock to a finder and amended the finder's existing
warrants to acquire 33,333 shares of Common Stock as to exercise
price, expiration date and forced conversion feature, to conform
the terms of such warrants to the terms of warrants granted in
the Regulation S unit offering noted above.
As compensation for identifying the placement agent for the
Regulation S unit offering, the finder earned a four percent
stock fee of the gross proceeds of the offering. In payment of
this fee, the Company during the first quarter, issued 17,817
shares of Common Stock in connection with the initial closing
and during the second quarter issued an aggregate 8,192 shares of
Common Stock as compensation for the subsequent closings.
Effective March 1, 1996, the terms of warrants issued to a
financial advisor were amended as partial consideration for
introducing to the Company the purchaser of the Gonzalez Gas
Unit, comprising a portion of the Berry R. Cox Field. The
warrant exercise price was reduced from $15.00 to $7.50 and the
term of the warrant was extended for three years to March 1,
1999.
During August 1996, the Company issued to a finder 18,666
warrants to purchase 18,666 shares of Common Stock, as
compensation for the placement with their clients of 186,666
units, comprised of shares of Common Stock and warrants to
purchase Common Stock.
During October 1996, the Company issued approximately 93,333
shares of Common Stock plus warrants to acquire 166,666 shares of
Common Stock, as compensation to an individual in consideration
for a consulting arrangement, whereby the consultant would
introduce persons interested in investing in China through the
Company. During February 1997, the consultant canceled the
consultant agreement and returned to the Company the shares and
warrants issued in connection therewith.
During October 1996, the Company issued 100,000 warrants to
acquire 100,000 shares of Common Stock, as compensation to an
individual for past fund raising services.
1995
----
During the first quarter of 1995, the Company issued 1,247
shares of Common Stock in payment of interest on funds escrowed
in advance of purchase of Series D Preferred Stock.
During September 1995, the Company issued 3,333 units, each
unit comprised of one share of Common Stock and a five-year
warrant to purchase one share of Common Stock, plus an additional
five-year warrant on the same terms as the unit warrant to
purchase 3,333 shares of Common Stock as compensation to an
individual who assisted the Company with a private placement of
approximately 200,000 units.
(4) Receivables
The Company's trade accounts receivable at December 31,
1997, 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
accounted for approximately 76 percent of oil and gas revenue
receivables in 1997, 76 percent in 1996 and 67 percent in 1995.
(5) Assets Held for Sale and Investments
Assets Held for Sale
--------------------
Domestic Oil and Gas Properties
-------------------------------
During 1996, the Company was engaged in attempts to sell its
remaining domestic oil and gas properties and had a contract in
place for the sale of the property. Prior to the sale being
consummated, the Company received service of three lawsuits filed
by lessors of the most productive remaining leases, effectively
thwarting the Company's ability to consummate the sale by casting
doubt as to the Company's rights to certain interests in the
leases and demanding damages. While the Company believes that
the charges are without merit, it is of the opinion that the
property cannot be sold until such time as the litigation is
concluded or settled. In response to a request by the lessors'
counsel, the Company has granted the lessors an extension of time
to respond to discovery demands made by the Company and to allow
sufficient time to pursue settlement of this litigation (see Note
11). As a result of these lawsuits the Company took an
additional writedown of these properties aggregating $3.85
million during 1996.
Lutcher Moore Tract
-------------------
During 1993, the Company completed the acquisition of a
group of corporations which together owned 100 percent of an
unevaluated 62,500-acre tract in southeastern Louisiana (the
"Lutcher Moore Tract"). This property is pledged as collateral
for the Lutcher Moore limited recourse debt (see Note 6). This
property is being held for sale.
Investments
- -----------
Lube Oil Investment
-------------------
On July 17, 1995, the Company signed a contract with CNPC
United Lube Oil Corporation to form a joint venture company to
engage in the manufacturing, distribution and marketing of
lubricating oil in China and southeast Asian markets. As of
December 31, 1997, the Company has invested approximately $3.3
million in the project.
Coalbed Methane Project
-----------------------
During 1995, the Company signed an agreement with the China
National Administration of Coal Geology, pursuant to which the
parties have commenced cooperation for the exploration and
development of coalbed methane in two areas in China. As of
December 31, 1997, the Company has invested approximately $0.6
million in the project.
(6) Debt
Long-term debt consists of the following (000's):
December 31
-----------------
1997 1996
---- ----
Senior secured notes, net of unamortized discount $ 61,310 $ --
Collateralized credit facility -- 17,279
Subordinated debt -- 15,000
Office building mortgage loan -- 652
------- -------
61,310 32,931
Lutcher Moore Group Limited Recourse Debt 2,524 5,091
------- -------
63,834 38,022
Less current maturities:
Lutcher Moore Group Limited Recourse Debt (2,524) (5,091)
Collateralized credit facility -- (17,279)
Subordinated Debt -- (15,000)
Other current maturities -- (652)
------- -------
$ 61,310 $ --
======= =======
Substantially all of the Company's assets collateralize
these borrowings. Accounts payable and accrued costs include
accrued interest at December 31, 1997 and 1996 of $1.8 million
and $1.5 million, respectively.
Senior Secured Notes
--------------------
On May 20, 1997, the Company sold in an unregistered
offering to qualified institutional buyers and accredited
institutional investors (the "Note Offering") 75,000 Note Units,
each consisting of $1,000 principal amount of 13.5% Senior
Secured Notes due May 1, 2004 (collectively, the "Notes") and one
Common Stock Purchase Warrant (collectively the "Note Warrants")
to purchase 85 shares of the Company's common stock, par value
$0.01 per share (the "Common Stock"), at an exercise price of
$3.09 per share, first exercisable after May 20, 1998. Total
funds received of $75 million were allocated, $15 million to the
Note Warrants and $60 million to the Notes. The value allocated
to the Note Warrants is being amortized to interest expense over
the term of the Notes. At December 31, 1997, the unamortized
discount on the Notes is approximately $13.7 million.
Interest on the Notes is payable semi-annually on May 1 and
November 1, commencing November 1, 1997. The Notes will mature
on May 1, 2004. The Notes are not redeemable at the option of the
Company prior to May 1, 2002, except that the Company may redeem,
at its option prior to May 1, 2002, up to 35% of the original
aggregate principal amount of the Notes, at a redemption price of
113.5% of the aggregate principal amount of the Notes, plus
accrued and unpaid interest, if any, to the date of redemption,
with the net proceeds of any equity offering completed within 90
days prior to such redemption; provided that at least $48.75
million in aggregate principal amount of the Notes remain
outstanding. On or after May 1, 2002, the Notes are redeemable
at the option of the Company, in whole or in part, at an initial
redemption price of 106.75% of the aggregate principal amount of
the Notes until May 1, 2003, and at par thereafter, plus accrued
and unpaid interest, if any, to the date of redemption. Upon the
occurrence of a change of control, as defined, the Company will
be obligated to make an offer to purchase all outstanding Notes
at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase.
Total interest expense incurred on the Notes was approximately
$6.2 million for the year ended December 31, 1997.
The Senior Secured Notes restrict, among other things, the
Company's ability to incur additional debt, incur liens, pay
dividends, or make certain other restricted payments. It also
limits the Company's ability to consummate certain asset sales,
enter into certain transactions with affiliates, enter into
mergers or consolidations, or dispose of substantially all the
Company's assets. The Company's ability to comply with such
covenants may be affected by events beyond its control. The
breach of any of these covenants could result in a default. A
default could allow holders of the Notes to declare all amounts
outstanding and accrued interest immediately due and payable.
Absent such payment, the holders could proceed against any
collateral granted to them to secure such indebtedness, which
includes all of the stock of the Company's principal operating
subsidiary, XCL-China, which has guaranteed such indebtedness. A
foreclosure on the stock of XCL China could trigger Apache's
right of first refusal under the Participation Agreement to
purchase such stock or its option to purchase the Company's
interest in the Contract. There can be no assurance that the
assets of the Company and XCL-China (a "Subsidiary Guarantor"),
or any other Subsidiary Guarantors would be sufficient to fully
repay the Notes and the Company's other indebtedness.
(7) Shareholders' Equity
Preferred Stock
---------------
As of December 31, 1997 and 1996, the Company had the
following shares of Preferred Stock issued and outstanding:
<TABLE>
<CAPTION>
Preference in 1997 Dividends
Shares Liquidation at (In Thousands)
1997 1996 December 31, 1997 Declared Accrued Total
---- ---- ----------------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Series A -- 577,803 $ -- $ 9,678 $ -- $ 9,678
Series B 44,465 44,954 4,446,500 262 186 448
Series E -- 46,654 -- 750 -- 750
Series F 22,318 -- 2,231,800 127 133 260
Amended Series A 1,129,453 -- 96,003,505 1,098 1,494 2,592
----------- ------ ----- ------
$102,681,805 $ 11,915 $ 1,813 $ 13,728
=========== ====== ===== ======
</TABLE>
Amended Series A Preferred Stock
--------------------------------
On May 20, 1997, the Company sold, in an unregistered
offering to qualified institutional buyers and accredited
institutional investors (the "Equity Offering") 294,118 Equity
Units, each consisting of one share of Amended Series A,
Cumulative Convertible Preferred Stock, par value $1.00 per share
("Amended Series A Preferred Stock"), and one Common Stock
Purchase Warrant (collectively, the "Equity Warrants") to
purchase approximately 22 shares of the Company's Common Stock,
at an initial exercise price of $3.09 per share, first
exercisable on May 20, 1998.
Each share of Amended Series A Preferred Stock has a
liquidation value of $85.00, plus accrued and unpaid dividends.
Dividends on the Amended Series A Preferred Stock are cumulative
from May 20, 1997 and are payable semi-annually, commencing
November 1, 1997, at an annual rate of $8.075 per share.
Dividends are payable in additional shares of Amended Series A
Preferred Stock (valued at $85.00 per share) through November 1,
2000, and thereafter in cash, or at the election of the Company,
in additional shares of Amended Series A Preferred Stock. The
Amended Series A Preferred Stock is convertible into Common
Stock, at any time after the first anniversary of the issue date,
at the option of the holders thereof, unless previously redeemed,
at an initial conversion price of $7.50 per share of Common Stock
(equivalent to a rate of 11 shares of Common Stock for each share
of Amended Series A Preferred Stock), subject to adjustment under
certain conditions. The Company is entitled to require
conversion of all the outstanding shares of Amended Series A
Preferred Stock, at any time after November 20, 1997 if the
Common Stock shall have traded for 20 trading days during any 30
consecutive trading day period at a market value equal to or
greater than 150% of the prevailing conversion rate.
The Amended Series A Preferred Stock is redeemable at any
time on or after May 1, 2002, in whole or in part, at the option
of the Company initially at a redemption price of $90.00 per
share and thereafter at redemption prices which decrease ratably
annually to $85.00 per share on and after May 1, 2006, plus
accrued and unpaid dividends to the redemption date. The Amended
Series A Preferred Stock is mandatorily redeemable, in whole, on
May 1, 2007, at a redemption price of $85.00 per share, plus
accrued and unpaid dividends to the redemption date, payable in
cash, or at the election of the Company, in Common Stock.
Upon the occurrence of a change in control or certain other
fundamental changes, the conversion price of the Amended Series A
Preferred Stock will be reduced, for a limited period, in certain
circumstances in order to provide holders with loss protection at
a time when the market value of the Common Stock is less than the
then prevailing conversion price.
The Amended Series A Preferred Stock will entitle the holder
thereof to cast the same number of votes as the shares of Common
Stock then issuable upon conversion thereof on any matter subject
to the vote of the holders of the Common Stock. Further, the
holders of the Amended Series A Preferred Stock will be entitled
to vote as a separate class (i) to elect two directors if the
Company is in arrears in payment of three semi-annual dividends,
and (ii) the approval of two-thirds of the then outstanding
Amended Series A Preferred Stock will be required for the
issuance of any class or series of stock ranking prior to the
Amended Series A Preferred Stock, as to dividends, liquidation
rights and for certain amendments to the Company's Certificate of
Incorporation that adversely affect the rights of holders of the
Amended Series A Preferred Stock.
Effective November 10, 1997, by consent of in excess of 88
percent of the outstanding shares of Series A Preferred Stock
such series of preferred stock was amended, reclassified and
converted to Amended Series A Preferred Stock. As a consequence
of such consent all dividend arrearages, and accrued and unpaid
dividends were paid in additional shares of Amended Series A
Preferred Stock. This amendment resulted in approximately
726,907 shares of Amended Series A Preferred Stock being issued
in respect of such reclassification and payment of dividends.
Effective November 10, 1997, by consent of in excess of 67
percent of the outstanding Series E Preferred Stock such series
of preferred stock was amended, reclassified and converted to
Amended Series A Preferred Stock. As a consequence of such
consent all accrued and unpaid dividends were paid in additional
shares of Amended Series A Preferred Stock. This amendment
resulted in approximately 63,706 shares of Amended Series A
Preferred Stock being issued in respect of such reclassification
and payment of dividends.
Series B Preferred Stock
------------------------
The Series B, Cumulative Convertible Preferred Stock, par
value $1.00 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; ranks senior to the
Common Stock and pari passu with the Amended Series A and Series
F Preferred Stocks of the Company with respect to the payment of
dividends and distributions on liquidation; and has a liquidation
preference of $100 per share plus accumulated dividends.
On May 16, 1995, the Company received notice from the Series
B Preferred holder exercising its redemption rights. The Company
elected to redeem in shares of Common Stock and the holder
exercised its option to have the Company sell its shares of
Common Stock. The aggregate redemption price was $5 million,
plus accrued dividends from January 1, 1995 to the date of
redemption. Approximately 5,535 shares had been redeemed at
December 31, 1997, from the sale of approximately 353,333 shares
of Common Stock. In July 1997, the holder of the Series B
Preferred Stock sued the Company and each of its directors with
respect to the alleged failure of the Company to redeem the
Series B Preferred Stock in accordance with the terms of the
Purchase Agreement and Certificate of Designation. In settlement
of that lawsuit in March 1998, the holder of the Series B
Preferred Stock revoked and withdrew its redemption notice and
sold its shares of Series B Preferred Stock and accompanying
warrants. The purchasers exchanged the stock and warrants for
44,465 shares of Amended Series B Preferred Stock and warrants to
purchase 250,000 shares of Common Stock at an exercise price of
$5.50 per share, subject to adjustment, expiring March 2, 2002,
and received 2,620 shares of Amended Series B Preferred Stock in
payment of all accrued and unpaid dividends on the Series B
Preferred Stock.
Each share of Amended Series B Preferred Stock has a
liquidation value of $100, plus accrued and unpaid dividends.
Dividends on the Amended Series B Preferred Stock are cumulative
from March 3, 1998 and are payable semi-annually on June 30 and
December 31 of each year, at an annual rate of $9.50 per share if
paid in cash. In lieu of payment in cash, the Company may, at
its option, elect to pay any dividend in kind in shares of either
Common Stock or Amended Series B Preferred Stock at the option
of the holder. If such dividend is paid in shares of Amended
Series B Preferred Stock, the dividend will be 0.0475 shares of
dividend stock per share of Amended Series B Preferred Stock
held. If the dividend is paid in shares of Common Stock, the
dividend shall equal the number of shares of Common Stock equal
to the quotient obtained by dividing $4.75 by the lowest average
closing price per share of Common Stock as calculated for the
last 5, 10 and 30 trading days preceding the dividend payment
date. Fractional shares will be paid in cash or aggregated and
sold on behalf of the holders. The Amended Series B Preferred
Stock is convertible into Common Stock, at any time after the
earlier of the effective date of the registration of such Common
Stock or August 31, 1998.
Series F Preferred Stock
------------------------
In January 1998, the holders of the Series F Preferred Stock
approved an amendment to the "forced conversion" terms of the
Series F Preferred Stock. Effective January 16, 1998, the
Company forced conversion of the Series F Preferred Stock and an
aggregate of 633,893 shares of Common Stock were issued upon
conversion and in payment of accrued and unpaid dividends. In
consideration for such amendment the holders of the Series F
Preferred Stock were issued warrants to acquire an aggregate of
153,332 shares of Common Stock at an exercise price of $0.15 per
share.
Dividends
---------
Prior to November 1997, dividends with respect to the Series
A Preferred Stock were in arrearage. Effective November 10, 1997,
the Series A Preferred Stock was amended, reclassified and
converted to Amended Series A Preferred Stock. As a consequence
of such consent all dividend arrearages, and accrued and unpaid
dividends were paid in additional shares of Amended Series A
Preferred Stock.
Dividends during 1997 and 1996 on the Series B Preferred
Stock were paid from proceeds of sales of redemption stock, which
were applied first to accrued dividend then the redemption of
shares of Series B Preferred Stock. On March 3, 1998, all
accrued and unpaid dividends on the Series B Preferred Stock were
paid in shares of Amended Series B Preferred Stock.
During 1996, the Company issued 2,218 shares of Series E
Preferred Stock in payment of the June 1996 dividends payable on
the Series E Preferred Stock. During 1997, the Company issued
5,261 shares of Series E Preferred Stock in payment of the
December 31, 1996 and June 30, 1997 dividends on the Series E
Preferred Stock. Effective November 10, 1997, the Series E
Preferred Stock was amended, reclassified and converted to
Amended Series A Preferred Stock. As a consequence of such
consent all dividend arrearages, and accrued and unpaid dividends
were paid in additional shares of Amended Series A Preferred
Stock.
During 1997, the Company issued 1,261 shares of Series F
Preferred Stock in payment of the June 30, 1997 dividends payable
on the Series F Preferred Stock.
On November 3, 1997, 12,906 shares of Amended Series A
Preferred Stock were issued in respect of the dividend payable
November 1, 1997, in the amount of $1.1 million. Upon conversion
of the Series A and Series E Preferred Stocks into Amended Series
A Preferred Stock, approximately $9.23 in accrued and unpaid
dividends on Series A Preferred Stock and approximately $0.2 in
accrued and unpaid dividends on the Series E Preferred Stock were
paid through the issuance of 790,613 additional shares of Amended
Series A Preferred Stock.
Common Stock
------------
The Company issued 1,322,034, 1,888,461 and 1,264,854
shares of Common Stock during 1997, 1996 and 1995, respectively.
The Company had 20,307,454, 18,980,805 and 16,909,532 shares of
Common Stock outstanding at December 31, 1997, 1996 and 1995,
respectively.
Common Stock Warrants
---------------------
As of December 31, 1997, outstanding warrants to purchase
the Company's Common Stock are as follows:
<TABLE>
<CAPTION>
Common Stock
Issuable Upon Warrant Exercise Proceeds if
Exercise Price Exercised
------------- ---------------- ---------
<S> <C> <C> <C>
Total Warrants Expiring in 1998 6,667 $11.25 $ 75,000
Total Warrants Expiring after 1998 17,820,088 $0.15 to $22.50 69,000,193
---------- ----------
Total Warrants 17,826,755 $ 69,075,193
========== ==========
</TABLE>
During November 1996, the Company offered a holder of
136,000 warrants exercisable at $5.25 per share a reduction in
the exercise price of such warrants to $1.875 per share in
exchange for the immediate exercise of such warrants and the
issuance of a like number of new warrants. In January 1997,
136,000 shares of Common Stock were issued upon the exercise of
the warrants and 136,000 new warrants were issued, exercisable at
$1.875 per share. The Company received $255,000 upon exercise of
these warrants.
During February 1997, the Company offered to reduce the
exercise price on a total of 368,000 warrants issued in
connection with Regulation S offerings in December 1995 and March
1996, in exchange for their immediate exercise. The offer was
made to reduce the warrant price from $3.75 to $3.30 per share.
One holder of 176,000 warrants accepted the offer and exercised
all 176,000 warrants for which the Company received net proceeds
of $555,400. The Placement Agent agreed to accept $0.15 per
share rather than 8% of the exercise price as required under the
Placement Agent Agreement.
During April 1997, the Company issued an aggregate of
200,000 shares of Common Stock upon the exercise of warrants at
$1.875 per share and received an aggregate of $375,000 upon
exercise of such warrants.
During August and October 1997, the Company issued an
aggregate of 100,000 shares of Common Stock upon the exercise of
warrants at $2.8125 per share and received proceeds of $281,250
upon exercise of such warrants.
During October 1997, the Company issued 24,000 shares of
Common Stock upon the exercise of warrants at $1.875 per share
and received $45,000 in proceeds from such exercise.
Loss Per Share
--------------
The following table sets forth the computation of basic and
diluted loss per share.
For the Years Ended December 31,
______________________________
1997 1996 1995
---- ---- ----
Number of shares on which basic loss
per share is calculated: 20,541 17,705 16,047
Number of shares on which diluted
loss per share is calculated: 20,541 17,705 16,047
Net loss applicable to common shareholders $(27,722) $(17,430) $(92,658)
Basic loss per share $ (1.36) $ (0.98) $ (5.77)
Diluted loss per share $ (1.36) $ (0.98) $ (5.77)
The effect of 33,902,036, 5,103,082 and 4,398,380 shares of
potential common stock were anti-dilutive in 1997, 1996 and 1995,
respectively, due to the losses in all three years.
(8) Income Taxes
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 the
entire amount.
The significant components of the net deferred tax expense
(benefit) for 1997 and 1996, were as follows (000's):
1997 1996
---- ----
Current year domestic net operating loss $ (4,758) $ (4,387)
Current year Chinese deferred costs (356) (829)
Prior year under accrual of Chinese deferred costs (537) --
Tax/book depreciation, depletion and amortization
difference 3,149 3,046
Oil and gas property expenditures treated as expense
for income tax purposes -- 41
Other accruals 13 (1,348)
Reserve for investments -- (855)
Increase (decrease) in valuation allowance 2,489 4,332
------ ------
$ -- $ --
====== ======
The components of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996, were as follows (in
000's):
1997 1996
---- ----
Deferred tax assets:
Domestic net operating loss carryforwards $ 63,730 $ 58,972
Chinese deferred costs 4,439 3,546
Other liabilities and reserves 2,802 2,815
Property and equipment, net 12,593 15,742
Valuation allowance (83,564) (81,075)
------ ------
Total deferred tax assets $ -- $ --
======= ======
At December 31, 1997, the Company had net operating loss
carryforwards for tax purposes in the approximate amount of $174
million which are scheduled to expire by the year 2012.
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. Use
of the net operating loss carryforwards is subject to limitations
under Section 382 of the Internal Revenue Code.
At December 31, 1997, the Company had alternative minimum
tax net operating loss carryforwards in the approximate amount of
$114 million which are scheduled to expire by the year 2012.
Additionally, the Company has acquired alternative minimum tax
net operating 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 $1.0 million of general business credit carryforwards
which are available until the year 2000 to offset future tax
liabilities of an acquired subsidiary. The Company also has
deferred costs associated with its Chinese operations of
approximately $13 million. The costs will be amortized and
deducted for Chinese tax purposes when the Company generates
revenue from its Chinese operations.
(9) Stock Option Plans
The Company's stock option plans, administered by the
compensation committee, 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 and are accounted for in accordance with Accounting
Principles Board Opinion No. 25. 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.
In December 1997, the shareholders of the Company approved
the amendment and restatement of the Company's LTSIP, effective
as of June 1, 1997, (i) increasing the number of shares issuable
under the LTSIP by 4 million (post-split) shares of Common Stock,
(ii) authorizing 200,000 shares of preferred stock for issuance
under the LTSIP, and (iii) ratifying certain grants of non-
qualified stock options and restricted stock awards to certain
officers and directors of the Company. The LTSIP, as amended and
restated, also allows for the grant of appreciation option
awards. A grant of an appreciation option award to Mr. Miller was
ratified at that same meeting.
The restricted stock awards generally rests only upon
attainment of certain increases in the market price of the
Company's Common Stock within four years from date of grant. All
of the restricted stock awards entitle the participants to full
dividend and voting rights. Unvested shares are restricted as to
disposition and subject to forfeiture under certain conditions.
Upon issuance of restricted shares, unearned compensation is
charged to shareholders' equity for the cost of restricted stock
and recognized as amortization expense ratably over the vesting
period, as applicable. The amount recognized for 1997 was not
material because the measurement date was December 17, 1997.
The appreciation option awarded to the Chairman provides him
with the right upon his payment of the exercise price (20% of
amount entitled to receive) to additional compensation payable in
cash or in shares of Common Stock based upon 5% of the difference
between the market capitalization (as defined) of the Company as
of June 1, 1997, and the date the option is exercised (no earlier
than June 1, 2002). Because the option contemplates compensation
determined with reference to increases in the market
capitalization without restriction, there is no effective limit
on the amount of compensation which may become payable
thereunder. Deferred compensation of $3.2 million was recorded in
connection with the appreciation option and is being amortized
over the service period. The appreciation option expires on June
1, 2007. Compensation expense recognized in 1997 was
approximately $373,000.
Non-qualified options granted on June 1, 1997 for an option
price of $3.75 per share resulted in compensation expense for
1997 of $481,000. The measurement date was established on
December 17, 1997, the date of shareholder approval.
A summary of the stock option plans activity for the years
ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price Per Share Exercise Price
------ ---------------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 831,012 $12.50-$22.50 $18.83
Granted 45,333 $18.75 $18.75
Forfeited (104,167) $12.50-$22.50 $18.23
--------- ------------ -----
Outstanding at December 31, 1995 772,178 $12.50-$22.50 $18.91
Granted 16,133 $18.75 $18.75
Forfeited (101,467) $18.75 - $22.50 $20.14
--------- -------------- -----
Outstanding at December 31, 1996 686,844 $12.50 - $22.50 $18.72
Granted 2,000,000 $3.75 $3.75
Forfeited (7,238) $18.75 - $22.50 $19.12
--------- -------------- -----
Outstanding at December 31, 1997 2,679,606 $3.75 - $22.50 $7.55
========= ============= ====
Options exercisable at December 31, 1997 676,451
=======
Options exercisable at December 31, 1998 676,089
=======
Options exercisable at December 31, 1999 683,888
=======
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
_______________________________________________________________________ __________________________________
Weighted Average
Range of Outstanding at remaining life Weighted Average Exercisable Weighted Average
Exercise Prices December 31, 1997 years Exercise Price December 31, 1997 Exercise Price
- --------------- ----------------- ----- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$3.75 2,000,000 9.5 $3.75 -- --
$18.75-$22.50 679,606 3.4 $18.72 676,451 $18.72
--------- ------- -----
2,679,606 676,451 $18.72
========= ======= =====
</TABLE>
The weighted average fair value of options granted during 1997
was $5.50.
If compensation expense for the stock options had been
determined and recorded based on the fair value on the grant date
using the Black-Scholes option pricing model to estimate the
theoretical future value of those options, the Company's net loss
per share amounts would have been reduced to the pro forma
amounts indicated below (000's, except per share data):
1997 1996 1995
---- ---- ----
Net loss as reported $ (27,722) $ (17,430) $ (92,658)
Compensation expense 1,012 126 537
------ ------ -------
Pro forma loss $ (28,734) $ (17,556) $ (93,195)
====== ====== ======
Pro forma loss per share:
Basic $ (1.40) $ (0.99) $ (5.81)
==== ==== ====
Diluted $ (1.40) $ (0.99) $ (5.81)
==== ==== ====
Weighted average shares 20,451 17,705 16,047
====== ====== ======
Due to uncertainties in these estimates, such as market prices,
exercise possibilities and the possibility of future awards and
cancellations, these pro forma disclosures are not likely to be
representative of the effects on reported income for future
years.
For pro forma purposes, the fair value of each option grant is
estimated on the date of grant with the following weighted
average assumptions:
1997 1996 1995
---- ---- ----
Expected life (years) 10 10 10
Interest rate 5.87% 6.68% 6.78%
Volatility 135.00% 100.00% 100.00%
Dividend yield -- -- --
(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. The Company, at its discretion and subject to
certain limitations, may contribute up to 75 percent of the
amount contributed by each participant. There were no Company
contributions in 1997, 1996 or 1995.
(11) Commitments and Contingencies
Other commitments and contingencies include:
o The Company acquired the rights to the exploration,
development and production of the Zhao Dong Block by executing a
Production Sharing Agreement with CNODC in February 1993. Under
the terms of the Production Sharing Agreement, the Company and
its partner are responsible for all exploration costs. If a
commercial discovery is made, and if 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 percent by CNODC and the remainder by the
Company and its partner.
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 its partner 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. These obligations have
been met.
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 (The Contractor has
elected to proceed with the second phase of the
Contract. The seismic data acquisition
requirement for the second phase has been
satisfied.)
3. During the last two years, the Contractor is
required to drill two wildcat wells and expend a
minimum of $4 million.
4. The Production Period for any oil and/or gas
field covered by the Contract (the "Contract
Area") will be 15 consecutive years (each of 12
months), commencing for each such field on the
date of commencement of commercial production (as
determined under the terms of the Contract).
However, prior to the Production Period, and
during the Development Period, oil and/or gas may
be produced and sold during a long-term testing
period.
The Production Sharing Agreement may be terminated by
the Contractor at the end of each phase of the
Exploration period, without further obligation.
o The Company is in dispute over a 1992 tax assessment by the
Louisiana Department of Revenue and Taxation for the years 1987
through 1991 in the approximate amount of $2.5 million. The
Company has also received a proposed assessment from the
Louisiana Department of Revenue and Taxation for income tax years
1991 and 1992, and franchise tax years 1992 through 1996 in the
approximate amount of $3.0 million. The Company has filed written
protests as to these proposed assessments, and will vigorously
contest the asserted deficiencies through the administrative
appeals process and, if necessary, litigation. The Company
believes that adequate provision has been made in the financial
statements for any liability.
o On July 26, 1996, an individual filed three lawsuits against
a wholly owned subsidiary with respect to oil and gas properties
held for sale. One suit alleges actual damage of $580,000 plus
additional amounts that could result from an accounting of a
pooled interest. Another seeks legal and related expenses of
$56,473 from an allegation the plaintiff was not adequately
represented before the Texas Railroad Commission. The third suit
seeks a declaratory judgement that a pooling of a 1938 lease and
another in 1985 should be declared terminated and further
plaintiffs seek damages in excess of $1 million to effect
environmental restoration. The Company believes these claims are
without merit and intends to vigorously defend itself.
o 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) Supplemental Financial Information
Quarterly Results of Operations (Unaudited)
Quarter
________________________________________
First Second Third Fourth Year
----- ------ ----- ------ ----
(Thousands of Dollars, Except Per Share Amounts)
1997
- ----
Oil and gas revenues $ 85 $ 53 $ 52 $ 46 $ 236
Loss from operations (816) (774) (976) (5,492) (8,058)
Net loss (1,211) (1,215) (417) (11,151) (13,994)
Net loss per share
Basic (0.15) (0.16) (0.11) (0.94) (1.36)
Diluted (0.15) (0.16) (0.11) (0.94) (1.36)
1996
- ----
Oil and gas revenues $ 576 $ 361 $ 94 $ 105 $ 1,136
Loss from operations (1,057) (1,970) (1,606) (5,160) (9,793)
Net loss (1,641) (3,062) (1,733) (5,638) (12,074)
Net loss per share
Basic (0.17) (0.20) (0.17) (0.38) (0.98)
Diluted (0.17) (0.20) (0.17) (0.38) (0.98)
Supplemental Oil and Gas Information
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 U.S. Oil and Gas Producing
Activities
The results of operations from oil and gas producing
activities for the three years ended December 31, 1997 are as
follows (000's):
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues from oil and gas producing activities:
Sales to unaffiliated parties $ 236 $ 1,136 $ 2,480
----- ------- ------
Production (lifting) costs:
Operating costs (including marketing) 210 342 985
State production taxes and other 13 28 51
----- ------- ------
Production costs 223 370 1,036
Depletion and amortization 77 437 1,989
Provision for impairment of oil and gas properties -- 3,850 75,300
----- ------- ------
Total expenses 300 4,657 78,325
----- ------- ------
Pretax loss from producing activities (64) (3,521) (75,845)
Income tax expense -- -- --
----- ------- ------
Results of oil and gas producing activities (excluding
corporate overhead and interest costs) $ (64) $ (3,521) $(75,845)
===== ====== ======
</TABLE>
The depreciation, depletion and amortization (DD&A) rate
averaged $0.81, $0.96 and $1.23 per equivalent Mcf in 1997, 1996
and 1995, respectively.
Capitalized Costs
-----------------
Capitalized costs relating to the Company's proved and
unevaluated oil and gas properties, are as follows (000's):
December 31
-----------------
1997 1996
---- ----
Foreign proved and unevaluated properties under
development $ 54,304 $ 34,305
====== ======
The capitalized costs for the foreign properties represent
cumulative expenditures related to the Zhao Dong Block Production
Sharing Agreement and will not be depreciated, depleted or
amortized until production is achieved.
The Company's investment in oil and gas properties as of
December 31, 1997, includes proved and 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. As
these properties become evaluated or developed, their cost and
related estimated future revenue will be included in the
calculation of the DD&A rate. Such costs were incurred as
follows:
Costs for foreign proved and unevaluated properties under
development were incurred as follows (000's):
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
Total 1997 1996 1995 1994 and Prior
----- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Property acquisition costs $ 40,616 $ 14,208 $ 4,223 $ 7,023 $ 15,162
Capitalized interest costs 13,688 5,791 2,767 2,596 2,534
------ ------ ----- ----- ------
Total foreign proved and
unevaluated properties
under development $ 54,304 $ 19,999 $ 6,990 $ 9,619 $ 17,696
====== ====== ===== ===== ======
</TABLE>
Capitalized Costs Incurred
--------------------------
Total capitalized costs incurred by the Company with respect
to its oil and gas producing activities including those held for
sale were as follows (000's):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Costs incurred:
Unproved properties acquired $ -- $ -- $ 7,209
Capitalized internal costs 2,466 822 135
Capitalized interest and amortized debt costs 5,791 2,767 3,075
Exploration 6,833 3,401 --
Development 4,909 4 1,590
------ ------ ------
Total costs incurred $19,999 $ 6,994 $12,009
====== ====== ======
</TABLE>
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 in 1997 and 1996 are located in China and in 1995
were located in the United States.
Crude Oil (MBbls)
------------------------
1997 1996 1995
---- ---- ----
Proved reserves -
Beginning of year 10,579 -- 294
Discoveries 1,183 10,579 --
Revisions of previous estimates -- -- 24
Production -- -- (19)
Purchases (sales) of minerals in place -- -- (241)
Transfer of property to assets held for sale -- -- (58)
------ ------ -----
End of year 11,762 10,579 --
====== ====== =====
Proved developed reserves -
Beginning of year -- -- 126
====== ====== =====
End of year -- -- --
====== ====== =====
Natural Gas (MMcf)
-------------------------
1997 1996 1995
---- ---- ----
Proved reserves -
Beginning of year -- -- 74,208
Discoveries -- -- (9,003)
Revisions of previous estimates -- -- --
Production -- -- (1,474)
Purchases (sales) of minerals in place -- -- (6,274)
Transfer of property to assets held for sale -- -- (57,457)
------ ----- ------
End of year -- -- --
====== ===== ======
Proved developed reserves -
Beginning of year -- -- 34,792
====== ===== ======
End of year -- -- --
====== ===== ======
The Company's estimated quantities of oil and gas as of
December 31, 1997 were prepared by H.J. Gruy and Associates,
Inc., independent engineers.
The revisions in the Company's estimated quantities of gas
and oil are attributable to revised estimates by Company
engineers in 1995. For fiscal 1995 significant downward
revisions were attributed to the Company's interest in the Cox
Field in Texas due largely 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 year-end, 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 year-end. 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 pretax 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 Securities and Exchange
Commission 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
------------------------------
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:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 (a) 1996 (a) 1995 (a)
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Future cash inflows $ 205,358 $ 222,797 $ 103,048
Future costs:
Production, including taxes (45,624) (39,033) (20,937)
Development (41,093) (40,904) (35,276)
------- ------- ------
Future net inflows before income taxes 118,641 142,860 46,835
Future income taxes (b) -- -- --
------- ------- ------
Future net cash flows 118,641 142,860 46,835
10% discount factor (56,194) (63,798) (20,795)
Transfer of properties to assets held for sale -- -- (26,040)
------- ------- -------
Standardized measure of discounted net cash flows $ 62,447 $ 79,062 $ --
======= ======= =======
</TABLE>
_____________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties only.
(b) No taxes have been reflected because of utilization of
net operating loss carryforwards.
Changes in Standardized Measure of Discounted Future Net Cash
Flow From Proven Reserve Quantities
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1997 (a) 1996 (a) 1995 (a)
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Standardized measure-beginning of year $ 79,062 $ -- $ 60,248
Increases (decreases):
Sales and transfers, net of production costs -- -- (1,347)
Net change in sales and transfer prices, net of
production costs (16,396) -- (15,095)
Extensions, discoveries and improved recovery,
net of future costs -- 79,062 --
Changes in estimated future development costs (189) -- (2,886)
Development costs incurred during the period that
reduced future development costs -- -- 1,117
Revisions of quantity estimates -- -- (8,003)
Accretion of discount -- -- 6,024
Purchase (sales) of reserves in place -- -- (4,654)
Changes in production rates (timing) and other -- -- (9,364)
Reclassification of reserves to assets held for
sale -- -- (26,040)
------- ------- -------
Standardized measure-end of year $ 62,477 $ 79,062 $ --
======= ======= =======
</TABLE>
__________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties only.
XCL Ltd. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(thousands of dollars)
<TABLE>
<CAPTION>
Additions
Balance at Charged Charges Balance at
Beginning of to costs to other End of
Description Year and expenses accounts Deduction Year
- ----------- ------------ ------------ -------- --------- -------
1997:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful trade
accounts receivable $ 101 $ -- $ -- $ 36 $ 65
======== ====== ===== ===== ======
Deferred tax valuation
allowance $ 81,075 $ 2,489 $ -- $ -- $ 83,564
======== ====== ===== ===== ======
1996:
Allowance for doubtful trade
accounts receivable $ 103 $ -- $ -- $ 2 $ 101
======== ====== ==== ===== ======
Deferred tax valuation
allowance $ 76,743 $ 4,332 $ -- $ -- $ 81,075
======== ====== ===== ===== ======
1995:
Allowance for doubtful trade
accounts receivable $ 113 $ -- $ -- $ 10 $ 103
======== ====== ===== ===== ======
Deferred tax valuation
allowance $ 44,464 $ 32,279 $ -- $ -- $ 76,743
======== ====== ===== ===== ======
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of XCL-China Ltd.
We have audited the financial statements of XCL-China Ltd. listed
in the Index on page F-1. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of XCL-China Ltd. as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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, presents fairly, in all material respects, the
information required to be included therein.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has not
generated production revenues, is dependent on its parent to meet
its cash flow requirements and must, in conjunction with its
parent company, generate additional cash flows to satisfy its
development and exploratory obligations with respect to its oil
and gas properties. There is no assurance that the Company or its
parent will be able to generate the necessary funds to satisfy
these contractual obligations and to ultimately achieve
profitable operations, which creates doubt about their ability to
continue as a going concern. Managements' plans in regard to
these matters are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1998
XCL-China, Ltd.
BALANCE SHEET
(Thousands of Dollars)
December 31
-----------
A S S E T S 1997 1996
----------- ---- ----
Current assets:
Accounts receivable, net $ 101 $ 122
Other 2 45
------ -------
Total current assets 103 167
------ -------
Property and equipment:
Oil and gas (full cost method):
Proved properties under development
not being amortized 21,172 13,571
Unevaluated properties 33,132 21,238
------ ------
54,304 34,809
------ ------
Other 167 138
54,471 34,947
------ ------
Accumulated depreciation (1) --
------ ------
54,470 34,947
------ ------
Other assets 668 --
------ ------
Total assets $ 55,241 $ 35,114
====== ======
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- -------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued costs $ 284 $ 556
Due to joint venture partner 4,504 4,202
------ ------
Total current liabilities 4,788 4,758
------ ------
Due to parent 52,383 31,573
Commitments and contingencies (Notes 2 and 5)
Shareholders' equity:
Common stock-$.01 par value; authorized
5 million shares at December 31, 1997
and 1996; issued shares of 1,000 shares
at December 31, 1997 and 1996 -- --
Retained deficit (1,930) (1,217)
------ ------
Total shareholders' deficit (1,930) (1,217)
------ ------
Total liabilities and
shareholders'deficit $ 55,241 $ 35,114
====== ======
The accompanying notes are an integral part of these financial statements.
XCL-China, Ltd.
STATEMENT OF OPERATIONS
(In Thousands)
Year Ended December 31
-----------------------------
1997 1996 1995
---- ---- ----
Revenues $ -- $ -- $ --
Costs and operating expenses:
Depreciation 1 -- --
General and administrative costs 578 702 536
------ ------ -----
579 702 536
------ ------ -----
Operating loss (579) (702) (536)
------ ------ -----
Other income (expense):
Interest expense, net of amounts capitalized (134) -- --
Interest income -- -- 49
------ ----- ------
(134) -- 49
------ ----- ------
Net loss $ (713) $ (702) $ (487)
======= ===== =====
The accompanying notes are an integral part of these financial statements.
XCL-China
STATEMENT OF SHAREHOLDERS' DEFICIT
(Thousands of Dollars)
Balance, December 31, 1994 $ (28)
Net loss (487)
-------
Balance, December 31, 1995 (515)
Net loss (702)
-------
Balance, December 31, 1996 (1,217)
Net loss (713)
-------
Balance, December 31, 1997 $ (1,930)
=======
The accompanying notes are an integral part of these financial statements.
XCL-China, Ltd.
STATEMENT OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (713) $ (702) $ (487)
------ ------ -----
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1 -- --
Change in assets and liabilities:
Accounts receivable 21 (58) 624
Accounts payable and accrued costs 30 2,825 801
Other, net (625) 83 81
------ ----- -----
Total adjustments (573) 2,850 1,506
------ ----- -----
Net cash (used in) provided by operating
activities (1,286) 2,148 1,019
------ ----- -----
Cash flows from investing activities:
Capital expenditures (15,889) (4,237) (7,284)
Other -- 249 (179)
------ ----- -----
Net cash used in investing activities (15,889) (3,988) (7,463)
------ ----- -----
Cash flows from financing activities:
Loan proceeds 6,100 -- --
Payment of long-term debt (6,100) -- --
Due to parent 17,175 1,840 4,468
------ ----- -----
Net cash provided by financing activities 17,175 1,840 4,468
------ ----- -----
Net increase (decrease) in cash and cash equivalents -- -- (1,976)
Cash and cash equivalents at beginning of year -- -- 1,976
------ ----- ------
Cash and cash equivalents at end of year $ -- $ -- $ --
====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
XCL-China, Ltd.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
Basis of Presentation:
---------------------
The financial statements include the accounts of XCL-China
Ltd. (the "Company"), a wholly owned subsidiary of XCL Ltd. (the
"parent").
Use of Estimates in the Preparation of Financial Statements:
The preparation of the Company's financial statements, in
conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues and expenses
and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Oil and Gas Properties:
----------------------
The Company accounts for its oil and gas exploration and
production activities using 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.
The 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 reserves in 1997 and 1996 were
estimated by independent petroleum engineers. 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 percent, 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 depreciation and depletion expense.
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, financial condition or cash flows. The
standardized measure of discounted future net cash flows includes
a deduction for any such costs.
Capitalized Interest:
- --------------------
During fiscal 1997, 1996 and 1995, interest and associated
costs of approximately $5.8 million, $2.8 million and $3.1
million, respectively were capitalized on significant investments
in oil and gas properties that are not being currently
depreciated, depleted, or amortized and on which exploration or
development activities are in progress.
Revenue Recognition:
-------------------
Oil and gas revenues will be recognized using the accrual
method at the price realized as production and delivery occurs.
Foreign Operations
------------------
The Company's future operations and earnings will depend
upon the results of the Company's operations in China. There can
be no assurance that the Company will be able to successfully
conduct such operations, and a failure to do so would have a
material adverse effect on the Company's financial position,
results of operations and cash flows. Also, the success of the
Company's operations will be subject to numerous contingencies,
some of which are beyond management's control. These
contingencies include general and regional economic conditions,
prices for crude oil and natural gas, competition and changes in
regulation. Since the Company is dependent on international
operations, specifically those in China, the Company will be
subject to various additional political, economic and other
uncertainties. Among other risks, the Company's operations will
be subject to the risks of restrictions on transfer of funds;
export duties, quotas and embargoes; domestic and international
customs and tariffs; and changing taxation policies, foreign
exchange restrictions, political conditions and governmental
regulations.
(2) Liquidity and Management's Plan
The Company's parent, in connection with its 1995 decision
to dispose of its domestic properties, is devoting all of its
efforts toward the development of the Company's properties. The
Company has historically relied on its parent to meet its cash
flow requirements. Although the parent has cash available in the
amount of approximately $32 million as of December 31, 1997
(including restricted cash of approximately $10 million) and a
positive working capital position, management anticipates that
the Company and its parent will need additional funds to meet all
of the development and exploratory obligations until sufficient
cash flows are generated from anticipated production to sustain
operations and to fund future development and exploration
obligations.
The parent plans to generate the additional cash needed
through the sale or financing of its domestic assets held for
sale and the completion of additional equity, debt or joint
venture transactions. There is no assurance, however, that the
parent will be able to sell or finance its assets held for sale
or to complete other transactions in the future at commercially
reasonable terms, if at all, or that the Company will be able to
meet its future contractual obligations. If production from the
Company's properties commences in late 1998 or the first half of
1999, as anticipated, the Company's proportionate share of the
related cash flow will be available to help satisfy cash
requirements. However, there is likewise no assurance that such
development will be successful and production will commence, and
that such cash flow will be available.
(3) Supplemental Cash Flow Information
There were no income taxes paid for the years ended December
31, 1997, 1996 and 1995.
(4) Income Taxes
Foreign income taxes are accounted for under the tax
structure in that country, principally China. As of December 31,
1997, the Company does not have undistributed earnings available
to its parent because of accumulated losses. Further, such
losses have provided no tax benefit to the parent company and
accordingly, there has been no tax impact. When necessary the
Company will enter into an appropriate tax sharing arrangement
with its parent.
(5) Other Commitments and Contingencies
Other commitments and contingencies include:
o The Company acquired the rights to the exploration,
development and production of the Zhao Dong Block by executing a
Production Sharing Agreement with CNODC in February 1993. Under
the terms of the Production Sharing Agreement, the Company and
its partner are responsible for all exploration costs. If a
commercial discovery is made, and if 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 percent by CNODC and the remainder by the
Company and its partner.
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 its partner 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. These obligations have
been met;
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 (The Contractor has
elected to proceed with the second phase of the
Contract. The seismic data acquisition
requirement for the second phase has been
satisfied.);
3. During the last two years, the Contractor is
required to drill two wildcat wells and expend a
minimum of $4 million.
4. The Production Period for any oil and/or gas
field covered by the Contract (the "Contract
Area") will be 15 consecutive years (each of 12
months), commencing for each such field on the
date of commencement of commercial production (as
determined under the terms of the Contract).
However, prior to the Production Period, and
during the Development Period, oil and/or gas may
be produced and sold during a long-term testing
period.
The Production Sharing Agreement may be terminated by
the Contractor at the end of each phase of the
Exploration period, without further obligation.
(6) Related Party Transactions
The Company has consistently borrowed money from its parent
for the acquisition and development of its oil and gas
properties. The amount due the parent as of December 31, 1997 is
approximately $52 million. All of
the Common Stock of the Company has been pledged as collateral
for parent company debt and the Company is a guarantor on certain
Senior Secured Notes described below.
Senior Secured Notes of Parent Company
--------------------------------------
On May 20, 1997, the parent company sold in an unregistered
offering to qualified institutional buyers and accredited
institutional investors 75,000 Note Units, each consisting of
$1,000 principal amount of 13.5% Senior Secured Notes due May 1,
2004 and one Common Stock Purchase Warrant to purchase 85 shares
of the parent's common stock, par value $0.01 per share (the
"Common Stock"), at an exercise price of $3.09 per share, first
exercisable after May 20, 1998.
Interest on the Notes is payable semi-annually on May 1 and
November 1, commencing November 1, 1997. The Notes will mature
on May 1, 2004. The Notes are not redeemable at the option of the
parent prior to May 1, 2002, except that the parent may redeem,
at its option prior to May 1, 2002, up to 35% of the original
aggregate principal amount of the Notes, at a redemption price of
113.5% of the aggregate principal amount of the Notes, plus
accrued and unpaid interest, if any, to the date of redemption,
with the net proceeds of any equity offering completed within 90
days prior to such redemption; provided that at least $48.75
million in aggregate principal amount of the Notes remain
outstanding. On or after May 1, 2002, the Notes are redeemable
at the option of the parent, in whole or in part, at an initial
redemption price of 106.75% of the aggregate principal amount of
the Notes until May 1, 2003, and at par thereafter, plus accrued
and unpaid interest, if any, to the date of redemption.
The Senior Secured Notes restrict, among other things, the
parent's and its subsidiaries ability to incur additional debt,
incur liens, pay dividends, or make certain other restricted
payments. It also limits the parent's ability to consummate
certain asset sales, enter into certain transactions with
affiliates, enter into mergers or consolidations, or dispose of
substantially all the parent's assets. The parent's ability to
comply with such covenants may be affected by events beyond its
control. The breach of any of these covenants could result in a
default. A default could allow holders of the Notes to declare
all amounts outstanding and accrued interest immediately due and
payable. A foreclosure on the stock of the Company could trigger
Apache's right of first refusal under the Participation Agreement
to purchase such stock or its option to purchase the parent's
interest in the Contract. There can be no assurance that the
assets of the parent and the Company, or any other Subsidiary
Guarantors would be sufficient to fully repay the Notes and the
parent's other indebtedness.
Supplemental Oil and Gas Information
------------------------------------
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."
Capitalized Costs
-----------------
Capitalized costs relating to the Company's proved and
unevaluated oil and gas properties, are as follows (000's):
December 31
------------------
1997 1996
---- ----
Proved and unevaluated properties under
development $ 54,304 $ 34,305
====== ======
The capitalized costs for the oil and gas properties
represent cumulative expenditures related to the Zhao Dong Block
Production Sharing Agreement and will not be depreciated,
depleted or amortized until production is achieved.
The Company's investment in oil and gas properties as of
December 31, 1997, includes proved and 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. As
these properties become evaluated or developed, their cost and
related estimated future revenue will be included in the
calculation of the DD&A rate. Such costs were incurred as
follows:
Costs for proved and unevaluated properties under
development were incurred as follows (000's):
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
Total 1997 1996 1995 1994 and Prior
----- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Property acquisition costs $ 40,616 $ 14,208 $ 4,223 $ 7,023 $ 15,162
Capitalized interest costs 13,688 5,791 2,767 2,596 2,534
-------- ------ ------- ------ -------
Total proved and
unevaluated properties
under development $ 54,304 $ 19,999 $ 6,990 $ 9,619 $ 17,696
======== ====== ====== ====== ======
</TABLE>
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
--------------------------
1997 1996 1995
---- ---- ----
Costs incurred:
Unproved properties acquired $ -- $ -- $ 5,298
Capitalized internal costs 2,466 822 135
Capitalized interest and amortized debt
costs 5,791 2,767 2,596
Exploration 6,833 3,401 --
Development 4,909 -- 1,590
------- ------ ------
Total costs incurred $ 19,999 $ 6,990 $ 9,619
======= ====== ======
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.
Crude Oil (MBbls)
---------------------
1997 1996
---- ----
Proved reserves -
Beginning of year 10,579 --
Discoveries 1,183 10,579
Revisions of previous estimates -- --
Production -- --
Purchases (sales) of minerals in place -- --
Transfer of property to assets held for sale -- --
------ ------
End of year 11,762 10,579
====== ======
Proved developed reserves -
Beginning of year -- --
===== ======
End of year -- --
===== ======
The Company's estimated quantities of oil and gas as of
December 31, 1997 were prepared by H.J. Gruy and Associates,
Inc., independent engineers.
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 year-end, 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 year-end. 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 pretax 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
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
----------------------
1997 1996
---- ----
(Thousands of Dollars)
Future cash inflows $ 205,358 $ 222,797
Future costs:
Production, including taxes (45,624) (39,033)
Development (41,093) (40,904)
------- -------
Future net inflows before income taxes 118,641 142,860
Future income taxes -- --
------- -------
Future net cash flows 118,641 142,860
10% discount factor (56,194) (63,798)
Transfer of properties to assets held for sale -- --
------- -------
Standardized measure of discounted net cash flows $ 62,447 $ 79,062
======= =======
Changes in Standardized Measure of Discounted Future Net Cash
Flow From Proven Reserve Quantities
Year Ended December 31
----------------------
1997 1996
---- ----
(Thousands of Dollars)
Standardized measure-beginning of year $ 79,062 $ --
Increases (decreases):
Sales and transfers, net of production costs -- --
Net change in sales and transfer prices, net of
production costs (16,396) --
Extensions, discoveries and improved recovery,
net of future costs -- 79,062
Changes in estimated future development costs (189) --
Development costs incurred during the period that
reduced future development costs -- --
Revisions of quantity estimates -- --
Accretion of discount -- --
Purchase (sales) of reserves in place -- --
Changes in production rates (timing) and other -- --
Reclassification of reserves to assets held for sale -- --
------- ------
Standardized measure-end of year $ 62,477 $ 79,062
======= ======
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.
[BACK COVER PAGE]
[Left Column]
No dealer, salesperson or any other person has been
authorized to give any information or to make any representations
in connection with the offer contained herein other than those
contained in this Prospectus, and, if given or made, such
information and representations must not be relied upon as having
been authorized by the Company or the Initial Purchaser. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any security other than those to which it
relates nor does it constitute an offer to sell, or a
solicitation of an offer to buy, to any person in any
jurisdiction in which such offer or solicitation is not
authorized, or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of
any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS Page
Available Information
Disclosure Regarding Forward-Looking Statements
Prospectus Summary
Risk Factors
Financial Restructuring
Use of Proceeds
Capitalization
Price Range of Common Stock
Dividend Policy
Selected Consolidated Financial Data
Summary of Oil and Gas Reserve Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Significant Events Affecting the Company
Since March 31, 1998
Business
Management
Security Ownership of Certain Beneficial
Owners and Management
Description of Existing Debt
Description of Capital Stock
Certain United States Income Tax Consequences
Selling Security Holders
Legal Matters
Independent Accountants
Engineers
Glossary of Terms
Index to Financial Statements F-1
Summary Report of H.J
Gruy Reserve Report A-1
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XCL Ltd.
1,163,115 Shares 9.50%
Amended Series A, Cumulative
Convertible Preferred Stock
32,950,698 Shares Common Stock
_____________________________
Prospectus
_____________________________
___________, 1998
PART II
Information Not Required in the Prospectus
Item 13. Other Expenses of Issuance and Distribution
Expenses in connection with the issuance and
distribution of the securities being registered are set forth in
the following table. All amounts except the registration fee are
estimated.
Expenses
--------
Registration Fee - Securities and Exchange Commission $
AMEX Filing Fee
Transfer Agent Fees and Expenses
Accounting Fees and Expenses
Legal Fees and Expenses
Blue Sky Fees and Expenses
Miscellaneous
-----------
TOTAL
===========
The Company will bear all of the expenses of the
registration of the Securities being offered.
Item 14. Indemnification of Directors and Officers
The Company's Amended and Restated Certificate of
Incorporation (the "Certificate") provides that:
(A) No director of the Company will be personally
liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
(B) Each person who was or is made a party or is
threatened to be made a party to or involved in any action suit
or proceeding whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact
that he or she is or was a director, officer or employee of the
Company or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan,
whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee
or agent, will be indemnified and held harmless by the Company to
the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but in the
case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification
rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, including excise
taxes with respect to an employee benefit plan, or penalties and
amounts paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification will
continue as to a person who has ceased to be a director, officer,
employee or agent and will inure to the benefit of his or her
heirs, executors and administrators; provided, however, that,
except as described in (C) below, the Company will indemnify any
such person seeking indemnification in connection with a
proceeding (or part hereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the board of
directors of the Company. The right to indemnification described
in this paragraph B includes the right to be paid by the Company
the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that if the Delaware
General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a
proceeding, will be made only upon delivery to the Company of an
undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it will ultimately be determined
that such director or officer is not entitled to be indemnified
under the Certificate or otherwise.
(C) If a claim described in paragraph (B) above is
not paid in full by the Company within thirty (30) after written
claim has been received by the Company, the claimant may at any
time thereafter bring suit against the Company to recover the
unpaid amount of the claim and, if successful in whole or in
part, the claimant will be entitled to be paid also the expense
of prosecuting such claim. It will be a defense to any such
action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its
final disposition where the required undertaking, if any is
required, has been tendered to the Company) that the claimant has
not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Company to indemnify
the claimant for the amount claimed, but the burden of proving
such defense will be on the Company. Neither the failure of the
Company (including its board of directors, independent legal
counsel, or its stockholders) to have made a determination prior
to the commencement of such action that indemnification of the
claimant is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the
Company (including its board of directors, independent legal
counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, will be a defense to the action
or create a presumption that the claimant has not met the
applicable standard of conduct.
(D) The right to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its
final disposition conferred in the Certificate will not be
exclusive of any right which any person may have or hereafter
acquire under any statute, provision of the Certificate, the
Amended and Restated Bylaws of the Company (the "Bylaws"),
agreement, vote of stockholders or disinterested directors or
otherwise.
(E) The Company may maintain insurance, at its
expense, to protect itself and any director, officer, employee or
agent of the Company or another corporation, partnership, joint
venture, trust or other enterprise, including an employee benefit
plan, against any such expense, liability or loss, whether or not
the Company would have the power to indemnify such person against
such expense, liability or loss under the Delaware General
Corporation Law.
(F) Upon resolution passed by the board of
directors, the Company may establish a trust or other designated
account, grant a security interest or use other means (including,
without limitation, a letter of credit) to ensure the payment of
certain of its obligations arising under the indemnification
provisions contained in the Certificate.
(G) If any part of the indemnification provisions
contained in the Certificate will be found, in any action, suit
or proceeding or appeal therefrom or in any other circumstances
or as to any particular officer, director or employee to be
unenforceable, ineffective or invalid for any reason, the
enforceability, effect and validity of the remaining parts or of
such parts in other circumstances will not be affected, except as
otherwise required by applicable law.
The Bylaws provide that:
(i) the Company will indemnify to the full
extent permitted by, and in the manner permissible
under, the laws of the State of Delaware any person
made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his
testator or intestate is or was a director or officer
of the Company or any predecessor of the Company, or
served any other enterprise as a director or officer at
the request of the Company or any predecessor of the
Company.
(ii) the rights of indemnification described
in paragraph (i) above will be deemed to be a contract
between the Company and each director and officer who
serves in such capacity at any time while such
provision is in effect, and any repeal or modification
thereof will not affect any rights or obligations then
existing or any action, suit or proceeding theretofore
brought based in whole or in part upon any such state
of facts;
(iii) the rights of indemnification described
in paragraphs (i) and (ii) above will not be deemed
exclusive of any other rights to which any director or
officer may be entitled apart from the provisions of
Article VIII of the Bylaws (governing indemnification);
and
(iv) the board of directors in its discretion
will have power on behalf of the Company to indemnify
any person, other than a director or officer, made a
party to any action, suit or proceeding by reason of
the fact that he, his testator or intestate, is or was
an employee of the Company.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
or persons controlling the registrant pursuant to the foregoing
provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
Common Stock and Common Stock Purchase Warrants/Debt Securities
- ---------------------------------------------------------------
The following issuances which occurred prior to December 17, 1997
have not been adjusted to reflect the Company`s one-for-fifteen
reverse stock split effected on December 17, 1997.
o On March 11, 1998, the Company sold an aggregate of 128,887
(post split) shares of Common Stock, through the exercise of
stock purchase warrants to four partnerships of KAIM Non-
Traditional, L.P. The warrants were exercisable at $1.875 per
share and the Company received $241,663 in payment of the
exercise price. The securities issued in this transaction were
not registered under the U.S. Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon the exemption provided
by Section 4(2) thereof.
o On March 11, 1998, the Company sold an aggregate of 455,809
(post split) shares of Common Stock, through the exercise of
stock purchase warrants to five partnerships of KAIM Non-
Traditional, L.P. The warrants were exercisable at $0.15 per
share and the Company received $68,371 in payment of the exercise
price. The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On January 23, 1998, the Company sold 11,333 (post split)
shares of Common Stock, through the exercise of stock purchase
warrants to Mr. Hans Ulrich Nadig. The warrants were exercisable
at $1.875 per share and the Company received $21,250 in payment
of the exercise price. The securities issued in this transaction
were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On January 19, 1998, the Company issued 55,625 (post split)
shares of Common Stock, to William Wang, a resident of Taiwan, in
respect of $222,500 payable in shares of Common Stock, pursuant
to the terms of a compensation agreement between the Company and
Mr. Wang dated October 1, 1997. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Regulation S thereof.
o In December 1997, the Company issued 86,190 (post split)
shares of Common Stock to certain holders of the Secured
Subordinated Notes in respect of $233,082.73 interest payable
April 1, 1997, including penalty interest thereon. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by Section
4(2) with respect to 21,547 shares and Regulation S with respect
to 64,643 shares.
o In December 1997, the Company issued 133,385 (post split)
shares of Common Stock to the holders of the Secured Subordinated
Notes in respect of $506,634.66 interest payable October 1, 1997,
including penalty interest thereon. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) with respect
to 90,510 shares and Regulation S with respect to 42,875 shares.
o On November 3, 1997, the Company issued an aggregate of
12,906 shares of Amended Series A Preferred Stock in respect of
dividends payable thereon in additional shares of Amended Series
A Preferred Stock due November 1, 1997. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o In November 1997, the Company issued 400,000 shares of
Common Stock and 200,000 Stock Purchase Warrants at an exercise
price of $0.25 per share on or before February 20, 2002 to
Patrick B. Collins as compensation under a Consulting Agreement
dated February 20, 1997. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On October 28 and 29, 1997, pursuant to an agreement
effective October 1, 1997, the Company issued to designees of
William Wang, who were all non-U.S. persons, an aggregate of
800,000 shares of Common Stock as compensation and to settle
certain instruments relating to prior compensation arrangements
between the Company and William Wang, a resident of Taiwan who
has performed services for the Company since 1991. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by
Regulation S thereof.
o On October 21, 1997, the Company sold 1,000,000 shares of
Common Stock, and on October 30, 1997, the Company sold 500,000
shares of Common Stock, both transactions through the exercise of
stock purchase warrants, to Providence Capital Limited of the
Cayman Islands. The warrants were exercisable at $0.1875 per
share and the Company received $281,250 in payment of the
exercise price. The securities issued in this transaction were
not registered under the Securities Act in reliance upon the
exemption provided by Regulation S thereof.
o On October 3, 1997, the Company sold 360,000 shares of
Common Stock, through the exercise of stock purchase warrants, to
Bank Hofmann AG of Zurich, Switzerland. The warrants were
exercisable at $0.125 per share and the Company received $45,000
in payment of the exercise price. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Regulation S thereof.
o On October 3, 1997, the Company issued an aggregate of
450,000 shares of Common Stock in settlement of litigation
initiated by Ms. Kathy McIlhenny, a former employee of the
Company. Ms. McIlhenny received 300,000 shares and her
attorneys, Jacques F. Bezou and Robert H. Matthews, received
90,000 and 60,000 shares respectively. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On July 1, 1997, the Company issued 3 million stock purchase
warrants to Providence Capital Ltd. as compensation pursuant to a
Consulting Agreement entered into effective July 1, 1997, whereby
providence Capital Ltd. will assist the Company in locating
sources of financing in capital markets in Canada. The warrants
are exercisable at $0.1875 per share and expire August 13, 2001.
The securities issued in this transaction were not registered
under the Securities Act in reliance upon the exemption provided
by Regulation S thereof.
o On August 19, 1997, the Company sold in a series of private
placements in compliance with Regulation S under the Securities
Act, an aggregate of 638,000 shares of Common Stock through the
exercise of warrants previously granted to Providence Capital
Ltd. The warrants were exercisable at $0.125 per share and the
Company received $79,750 in payment of the exercise price. The
warrants were exercised outside the U.S. by persons or entities
who certified that they were non-U.S. persons as defined in
Regulation S and the shares were all delivered against payment
outside the U.S. in accordance with such Regulation.
o As set forth below, the Company sold in a series of private
placement in compliance with Regulation S under the Securities
Act, an aggregate of 870,000 shares of Common Stock through the
exercise of warrants previously granted to Sreedeswar Holdings,
Inc. These warrants were initially issued on December 22, 1995,
in connection with a series of Unit offerings conducted through
Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,
Rauscher Pierce & Clark Ltd., as the Placement Agent, in
compliance with Regulation S of the Securities Act. The Company
agreed to reduce the exercise price of such warrants provided the
warrants were immediately exercised. Pursuant to such agreement
the initial warrant exercise prices of $0.25 per share were
reduced to $0.21 per share, net, with the Placement Agent
accepting $0.01 per share rather than 8% of the exercise price as
set forth in the Placement Agreement.
Exercise Warrants
Date Exercised Shares Issued Net Consideration
--------- --------- ------------- -----------------
May 22, 1997 870,000 870,000 $182,700
In all instances the warrants were exercised outside the U.S.
by persons or entities who certified that they were non-U.S.
person as defined in Regulation S and the shares were all
delivered against payment outside the U.S. in accordance with
such Regulation.
o On May 20, 1997, the Company consummated (i) a private
offering of 75,000 units (the "Debt Units"), each consisting of
$1,000 principal amount of 13.50% Senior Secured Notes due May 1,
2004 and one Common Stock Purchase Warrant to purchase 1,280
shares of the Common Stock and (ii) a private offering of 294,118
units (the "Equity Units," and together with the Debt Units, the
"Units"), each consisting of one share of Amended Series A
Preferred Stock and one Warrant to purchase 327 shares of the
Company's common stock. The Units were sold to the Initial
Purchaser in transactions not registered under the Securities Act
in reliance upon Section 4(2) of the Securities Act and thereupon
offered and sold by the Initial Purchaser only to certain
qualified institutional buyers and institutional accredited
investors. The aggregate offering price of the Debt Units was
$75,000,000 and the aggregate offering price of the Equity Units
was $25,000,030. The aggregate discount to the Initial Purchaser
with respect to the Debt Units was $3,000,000 and with respect to
the Equity Units was $1,500,000.
o On April 8, 1997, the Company sold an aggregate of 276,000
shares of Common Stock to Je Hyun Lee, a non-U.S. person, for
which it received consideration of $51,750. The securities issued
in this transaction were not registered under the Securities Act
in reliance upon the exemption provided by Regulation S thereof.
o As set forth below, the Company sold in a private placement
in compliance with Regulation S under the Securities Act, an
aggregate of 3,000,000 shares of Common Stock through the
exercise of warrants previously granted to Providence Capital
Ltd. These warrants were initially issued on December 31, 1996
as incentive to exercise 4,168,000 warrants acquired in
connection with series of Unit offerings conducted through
Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,
Rauscher Pierce & Clark Ltd., as the Placement Agent, in
compliance with Regulation S of the Securities Act.
Further, on April 22, 1997, the Company sold in a private
placement in compliance with Regulation S under the Securities
Act, 66,900 shares of Common Stock through the exercise of
warrants previously granted to Sreedeswar Holdings, Inc.
These warrants were initially issued on December 22, 1995, in
connection with a series of Unit offerings conducted through
Rauscher Pierce & Clark, Inc., and its wholly-owned
subsidiary, Rauscher Pierce & Clark Ltd., as the Placement
Agent, in compliance with Regulation S of the Securities Act.
The Company agreed to reduce the exercise price of such
warrants provided the warrants were immediately exercised.
Pursuant to such agreement the initial warrant exercise prices
of $0.25 per share were reduced to $0.21 per share, net, with
the Placement Agent accepting $0.01 per share rather than 8%
of the exercise price as set forth in the Placement Agreement.
Warrants Shares
Exercise Date Exercised Issued Net Consideration
-------------- --------- -------- ------------------
April 18, 1997 440,289 440,289 $ 55,036
April 22, 1997 66,900 66,900 $ 14,049
April 30, 1997 2,559,711 2,559,711 $ 319,964
In all instances the warrants were exercised outside the U.S.
by persons or entities who certified that they were non-U.S.
persons as defined in Regulation S and the shares were all
delivered against payment outside the U.S. in accordance with
such Regulation.
o On April 10, 1997, in connection with obtaining a loan for
XCL-China Ltd. of $3.1 million, the Company granted an aggregate
of 10,092,980 warrants to a group of four limited partnerships
managed by Kayne Anderson Investment Management, Inc. ("KAIM")
(6,837,180); J. Edgar Monroe Foundation (325,580); Estate of J.
Edgar Monroe (976,740); Boland Machine & Mfg. Co., Inc.
(325,580); and Construction Specialists, Inc. d/b/a Con-Spec,
Inc. (1,627,900), entitling such lenders the right to acquire
10,092,980 shares of Common Stock at $0.01 per share, exercisable
on or before April 9, 2002. All proceeds of this financing were
applied to reduce the Company's indebtedness to Apache incurred
in connection with Zhao Dong Block operations. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by Section
4(2) thereof.
o Stock Purchase Warrants dated April 10, 1997, were issued to
ING (U.S.) Capital Corporation, as consideration for entering
into a Forbearance Agreement with the Company. Each warrant is
exercisable at $0.01 per share on or before April 9, 2002,
entitling ING to purchase up to 7,000,000 shares of Common Stock.
The securities issued in this transaction were not registered
under the Securities Act in reliance upon the exemption provided
by Section 4(2) thereof.
o On March 26, 1997, the Company sold 3,200,000 shares of
Common Stock to Je Hyun Lee, a non-U.S. person, for consideration
of $600,000. The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Regulation S thereof.
o As set forth below, the Company sold in a series of private
placements in compliance with Regulation S under the Securities
Act, an aggregate of 73,000 shares of Common Stock through the
exercise of warrants previously granted to Sreedeswar Holdings,
Inc. These warrants were initially issued on December 22, 1995,
in connection with a series of Unit offerings conducted through
Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,
Rauscher Pierce & Clark Ltd., as the Placement Agent, in
compliance with Regulation S of the Securities Act. The Company
agreed to reduce the exercise price of such warrants provided the
warrants were immediately exercised. Pursuant to such agreement
the initial warrant exercise prices of $0.25 per share were
reduced to $0.21 per share, net, with the Placement Agent
accepting $0.01 per share rather than 8% of the exercise price as
set forth in the Placement Agreement.
Warrants Shares
Exercise Date Exercised Issued Net Consideration
------------- --------- ------ -----------------
March 21, 1997 73,000 73,000 $ 15,330
In all instances the warrants were exercised outside the U.S.
by persons or entities who certified that they were non-U.S.
persons as defined in Regulation S and the shares were all
delivered against payment outside the U.S. in accordance with
such Regulation.
o During February 1997, the Company sold its remaining
interest (41.089%) in the Seller Notes securing the Lutcher Moore
Tract ($217,961 in principal) to accredited investors for
$193,916 net after discount. In connection with the sale, the
Company issued stock purchase warrants to Donald A. and Joanne R.
Westerberg and T. Jerald Hanchey pursuant to which the purchasers
can acquire 1,874,467 shares of Common Stock at an exercise price
of $0.25 per share, expiring on December 31, 1999. The
securities issued by the Company in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o As set forth below, the Company sold in a series of private
placements in compliance with Regulation S under the Securities
Act, an aggregate of 1,630,100 shares of Common Stock through the
exercise of warrants previously granted to Sreedeswar Holdings,
Inc. These warrants were initially issued on December 22, 1995,
in connection with a series of Unit offerings conducted through
Rauscher Pierce & Clark, Inc., and its wholly-owned subsidiary,
Rauscher Pierce & Clark Ltd., as the Placement Agent, in
compliance with Regulation S of the Securities Act. The Company
agreed to reduce the exercise price of such warrants provided the
warrants were immediately exercised. Pursuant to such agreement
the initial warrant exercise prices of $0.25 per share were
reduced to $0.21 per share, net, with the Placement Agent
accepting $0.01 per share rather than 8% of the exercise price as
set forth in the Placement Agreement.
Warrants Shares
Exercise Date Exercised Issued Net Consideration
- ------------- --------- ------- -----------------
February 4, 1997 1,000,000 1,000,000 $ 210,000
February 11, 1997 340,200 340,200 $ 71,442
February 20, 1997 184,800 184,800 $ 38,808
February 24, 1997 105,100 105,100 $ 22,071
In all instances the warrants were exercised outside the U.S.
by persons or entities who certified that they were non-U.S.
persons as defined in Regulation S and the shares were all
delivered against payment outside the U.S. in accordance with
such Regulation.
o As set forth below, the Company sold in a series of private
placements in compliance with Regulation S under the Securities
Act, an aggregate of 4,168,000 shares of Common Stock through the
exercise of warrants previously granted to Janz Financial Corp.
Ltd., now known as Providence Capital Ltd., or a designee
thereof, who certified that it was not a U.S. person as defined
in Regulation S. These warrants were initially issued on March
8, 1996, and August 14, 1996, in connection with a series of Unit
offerings conducted through Rauscher Pierce & Clark, Inc., and
its wholly-owned subsidiary, Rauscher Pierce & Clark Ltd., as the
Placement Agent, in compliance with Regulation S of the
Securities Act. By agreement dated November 19, 1996, the
Company agreed to reduce the exercise prices of such warrants
provided the warrants were immediately exercised. Pursuant to
such agreement the initial warrant exercise prices of $0.35 and
$0.25 per share were reduced to $0.125 per share.
Warrants Shares
Exercise Date Exercised Issued Net Consideration
- ------------- --------- ------ -----------------
December 27, 1996 664,000 664,000 $ 83,000
December 31, 1996 664,000 664,000 $ 83,000
December 31, 1996 800,000 800,000 $100,000
January 8, 1997 530,000 530,000 $ 66,250
January 9, 1997 1,510,000 1,510,000 $188,750
In all instances the warrants were exercised outside the U.S.
by persons or entities who certified that they were non-U.S.
persons as defined in Regulation S and the shares were all
delivered against payment outside the U.S. in accordance with
such Regulation.
o In December 1996 and January 1997, the Company issued Stock
Purchase Warrants dated December 31, 1996 (2,128,000 warrants)
and January 8, 1997 (2,040,000 warrants) to purchase up to an
aggregate of 4,168,000 shares of Common Stock at $0.125 per share
on or before August 13, 2001 to Providence Capital Ltd. as
additional consideration for the immediate exercise of 4,168,000
warrants described above at the reduced exercise price. The
securities issued in this transaction were not registered under
the Securities Act in reliance upon the exemption provided by
Regulation S thereof.
o In November 1996, the Company issued 6,271,288 shares of
Common Stock to holders of its Secured Subordinated Notes in
respect of $1,064,415.08 of interest payable October 1, 1996,
including penalty interest thereon. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) with respect
to 5,330,594 shares and Regulation S with respect to 940,694
shares.
o In November 1996, the Company issued Stock Purchase Warrants
dated November 26, 1996, in connection with a sale of a 58.911%
interest in a 50% interest in certain promissory notes ($314,500
in principal) securing the Lutcher Moore Tract held by one of the
Company's wholly-owned subsidiaries for $250,000 in cash, net
after discount, entitling the following holders thereto to
purchase up to 2,666,666 shares of Common Stock at $0.125 per
share on or before December 31, 1999:
Warrant Holder Warrants
-------------- --------
Opportunity Associates, L.P. 133,333
Kayne Anderson Non-Traditional Investments, L.P. 666,666
Arbco Associates, L.P. 800,000
Offense Group Associates, L.P. 333,333
Foremost Insurance Company 266,667
Nobel Insurance Company 133,333
Evanston Insurance Company 133,333
Topa Insurance Company 200,000
The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On October 30, 1996, the Company issued 33,125 shares of
Common Stock and warrants to purchase an additional 33,125 shares
of Common Stock to Mr. A. Rosenbloom issued in lieu of $14,326
cash compensation. The shares of Common Stock and the warrants
were subsequently returned to the Company by the recipient for
personal business reasons. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On October 30, 1996, the Company issued 1,325,000 shares of
Common Stock and warrants to purchase an additional 2,466,875
shares of Common Stock to Mr. Mitch Leigh in lieu of
approximately $580,000 in cash compensation under a consulting
agreement dated July 10, 1996. In February 1997, effective
October 1996, Mr. Leigh cancelled the consulting agreement and
returned the above-referenced shares of Common Stock and warrants
to the Company. The securities issued in this transaction were
not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o In August 1996, the Company sold 1,500,000 shares of Common
Stock in a private placement transaction to Provincial Securities
Ltd. for net consideration of $200,000. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Regulation S thereof.
o In August 1996, the Company issued Common Stock Purchase
Warrants to Terrenex Acquisitions Corp. dated August 16, 1996,
entitling the holder thereof to purchase up to 300,000 shares of
Common Stock at $0.25 per share on or before December 31, 1998 as
compensation for locating a purchaser for 1,500,000 shares of
Common Stock sold to Provincial Securities Ltd. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by
Regulation S thereof.
o In August 1996, the Company issued 2,800,000 shares of
Common Stock and 2,800,000 Common Stock Purchase Warrants to Janz
Financial Corp. Ltd. ("Janz"), who placed the units with their
clients. Each unit was comprised of one share of Common Stock
and one five-year warrant to purchase one share of Common Stock.
The Company received $402,000 in proceeds from the placement. The
securities issued in this transaction were not registered under
the Securities Act in reliance upon the exemption provided by
Regulation S thereof.
o In August 1996, the Company issued to Janz, as compensation
for the placement of the 2,800,000 units described above, 280,000
Common Stock Purchase Warrants at an exercise price of $0.25 per
share until August 13, 2001. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Regulation S thereof.
o In July 1996, the Company issued 1,500,000 Common Stock
Purchase Warrants exercisable at $.25 per share expiring five
years after the date of issuance, to Arthur Rosenbloom as
consideration for past fundraising services. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by Section
4(2) thereof.
o In July 1996, the Company issued 50,000 shares of Common
Stock held as treasury stock to an accredited non-U.S.
institutional investor, The Securities Management Trust Limited
A/C K, in a brokered transaction, for net proceeds after fees and
discounts of $12,875. The securities issued in this transaction
were not registered under the Securities Act in reliance upon the
exemption provided by Regulation S thereof.
o In June 1996, the Company issued 920,000 shares of Common
Stock held as treasury stock to an accredited non-U.S.
institutional investor, The Securities Management Trust Limited
A/C K, in a series of brokered transactions, for net proceeds
after fees and discounts of $133,900. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Regulation S thereof.
o In May 1996, the Company issued an aggregate of 4,442,689
shares of Common Stock to the holders of its Secured Subordinated
Notes in consideration for $1,060,261.27 in interest payable
April 1, 1996, including penalty interest thereon. The securities
issued in this transaction were not registered under the
Securities Act in reliance upon the exemption provided by Section
4(2) with respect to 3,776,285 shares and Regulation S with
respect to 666,404 shares.
o On May 16, 1996, the Company issued 72,880 shares of Common
Stock to EnCap Investments, L.C. as consideration for a finders
fee of 4% ($22,775) earned in connection with the Regulation S
unit offering in Europe conducted by Rauscher Pierce & Clark, as
placement agent. The fee was based on the offering price of
$0.3125 per share. The securities issued in this transaction were
not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On the following dates, the Company issued the following
numbers of Common Stock Purchase Warrants to Rauscher Pierce &
Clark in consideration for acting as placement agent for
Regulation S Units offerings conducted in Europe:
Closing Date Warrants
------------ --------
December 22, 1995 696,000
March 8, 1996 204,000
April 23, 1996 180,000
The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Regulation S thereof.
o On the following dates the Company issued units, each unit
consisting of one share of Common Stock and Stock Purchase
Warrants to acquire one share of Common Stock, in connection with
a Regulation S unit offering conducted through Rauscher Pierce &
Clark, as placement agent, as follows:
Closing Date Consideration Common Stock Warrants
- ------------ ------------- ------------ --------
December 22, 1995 $ 1,800,000 6,960,000 6,960,000
March 8, 1996 $ 400,000 2,040,000 2,040,000
April 23, 1996 $ 349,000 1,800,000 1,800,000
The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Regulation S thereof.
o On February 9, 1996, the Company sold from treasury stock
416,667 units, each unit consisting of one share of Common Stock
and one warrant to purchase Common Stock, to Longhorn Partners,
at a unit price of $0.30 per unit. The warrants are exercisable
on or before December 28, 2000 at an exercise price of $0.50 per
share. The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On February 9, 1996, the Company issued to EnCap Investments
L.C. 50,000 shares of Common Stock held as treasury stock as
compensation for assisting the Company in transactions related to
the Zhao Dong Block. The securities issued in this transaction
were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o On February 9, 1996, the Company issued 317,264 shares of
Common Stock to EnCap Investments, L.C. as consideration for a
finders fee of 4% ($99,145) in connection with the Regulation S
unit offering in Europe conducted by Rauscher Pierce & Clark, as
placement agent. The fee was based on the offering price of
$0.3125 per share. The securities issued in this transaction were
not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o In January 1996, the Company issued 2,063,686 shares of
Common Stock to the holders of the Company's Secured Subordinated
Notes in respect of $1,091,184.11 of interest payable October 1,
1995, including penalty interest thereon. The securities issued
in this transaction were not registered under the Securities Act
in reliance upon the exemption provided by Section 4(2) with
respect to 1,754,133 shares and Regulation S with respect to
309,553 shares.
o In January 1996, the Company issued to Target Benefit
Pension Trust (66,667) and Butler Partners (416,667) Common Stock
Purchase Warrants exercisable at $.50 per share and expiring
December 28, 2000 in consideration for their agreement to not
sell shares of Common Stock acquired by them from certain
institutional investors for a 90-day period following the
acquisition. The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o In January 1996, the Company issued to the Trust of Mitch
Leigh FBO David Leigh (216,663) and FBO Rebecca Leigh (216,667)
Common Stock Purchase Warrants exercisable at $.50 per share
expiring January 2, 2001 in connection with a January 1996, in
consideration for their agreement not to sell shares of common
Stock acquired by them from certain institutional investors for a
90-day period following the acquisition. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On December 6, 1995, the Company sold to John Chandler, from
shares of Common Stock reserved for payment to William Wang,
186,896 shares of Common Stock at $0.35 per share. The proceeds
of $65,414 were applied to reduction of Mr. Wang's receivable
with the Company. The securities issued in this transaction were
not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) thereof.
o In December 1995, the Company issued to Messrs. Steven
Gottlieb (333,334); Ron Savarese (83,334) and Tushar Ramani
(333,334) Common Stock Purchase Warrants exercisable at $.50 per
share in consideration for their agreement to not sell shares of
Common Stock acquired by them from certain institutional
investors for a 90-day period following the acquisition. The
securities issued in this transaction were not registered under
the Securities Act in reliance upon the exemption provided by
Section 4(2) thereof.
o On September 21, 1995, the Company sold 75,000 units, each
unit comprised of one share of Common Stock and warrant to
purchase Common Stock to Arthur Rosenbloom for a purchase price
of $32,438 at $0.4325 per unit. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On September 21, 1995, the Company sold 3,000,000 units,
each unit comprised of one share of Common Stock and warrants to
purchase Common Stock to Mitch Leigh for a purchase price of
$1,297,500 at $0.4325 per unit. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o On September 21, 1995, the Company issued 50,000 shares of
Common Stock and 100,000 warrants to purchase Common Stock to
Arthur Rosenbloom in lieu of $22,125 of cash compensation for
placing 3,000,000 units (described below). In February 1997, Mr.
Rosenbloom returned these securities with the value of such
securities applied to Mr. Rosenbloom's subscription for Series F
Preferred Stock issued in February 1997. The securities issued in
this transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof.
o In August 1995, the Company issued an aggregate of 4,266,861
shares of Common Stock to its certain holders of Series A
Preferred Stock in respect of $1.2 million in dividends payable
December 31, 1994 and $1.3 million in dividends payable June 30,
1995. The securities issued in this transaction were not
registered under the Securities Act in reliance upon the
exemptions provided by Section 4(2) and Regulation S thereof.
o In June 1995, the Company issued 1,640,602 shares of Common
Stock to the holders of the Secured Subordinated Notes in respect
of $1,074,664.07 interest payable April 1, 1995, including
penalty interest thereon. The securities issued in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) with respect
to 1,394,511 shares and Regulation S with respect to 246,091
shares.
Series A Preferred Stock
------------------------
During 1990, the Company completed a rights offering of
600,000 units of 50 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 to purchase Common Stock which expired unexercised
pursuant to their terms. Until November 10, 1997 the Series A
Preferred Stock was listed on the London Stock Exchange, and:
ranked senior to Common Stock and pari passu with the Company's
Series B, Series E and Series F Preferred Stock with respect to
payment of dividends and distributions on liquidation; had a
liquidation preference of 50 pounds sterling (U.K.) per share plus
accrued and unpaid dividends; was not redeemable in certain limited
circumstances; was nonvoting as a class, except in certain circumstances,
including the right to cast 21 votes for each share of Series A Preferred
Stock held on all resolutions proposed at a meeting of shareholders if,
at the date of notice convening a meeting of shareholders, the dividend
on the Series A Preferred Stock was six months or more in
arrears. The Series A Preferred Stock was 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 bore 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, in additional shares of
Series A Preferred Stock.
During the second quarter of 1996, the Company issued
450,261 shares of Common Stock upon conversion of 21,441 shares
of Series A Preferred Stock, pursuant to the terms thereof.
During March 1997 an additional 39 shares of Series A Preferred
Stock were converted into 819 shares of Common Stock.
During February 1997, the Company sold 13,458 shares of
Series A Preferred Stock to accredited investors for $157,240.
The proceeds were used to pay the withholding taxes and
fractional interests with respect to the December 31, 1995
dividend payment. The securities issued by the Company in this
transaction were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) thereof. In
March 1997, the Company issued an additional 50,137 shares of
Series A Preferred Stock to holders of Series A Preferred Stock
in payment of this dividend, therefore fulfilling its obligation
for such dividend period. Effective November 10, 1997, the
Company recapitalized and combined the Series A Preferred Stock
into an aggregate of 726,907 shares of Amended Series A Preferred
Stock (including approximately $900,000 in unpaid dividends
declared for June 30, 1995 and accrued and unpaid dividends from
June 30, 1996 through November 9, 1997).
Series B Preferred Stock/Amended Series B Preferred Stock
------------------------------------------------------------
The Series B, Cumulative Convertible Preferred Stock,
par value $1.00 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; ranks senior to the
Common Stock and pari passu with the Series A and Series E
Preferred Stocks of the Company with respect to the payment of
dividends and distributions on liquidation; and 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.
In May 1995, the holder of the Series B Preferred Stock
exercised its redemption rights. In July 1997, the holder
commenced a lawsuit against the Company and its then-directors
regarding the redemption of the shares. Effective December 31,
1997, the Company and the holder of the Series B Preferred Stock
entered into an interim settlement with respect to the action,
conditioned upon the closing of the final settlement on or before
February 27, 1998 which was later extended to March 6, 1998. The
closing of the final settlement took place on March 3, 1998, and
on that date the holder of the Series B Preferred Stock sold the
stock and accompanying warrants to Arbco Associates, L.P., Kayne
Anderson Non-Traditional Investments, L.P., Offense Group
Associates, L.P. and Opportunity Associates, L.P., each a
California limited partnership whose general partner is KAIM Non-
Traditional, L.P. The purchasers exchanged the Series B
Preferred Stock and accompanying warrants for an aggregate of
44,465 shares of Amended Series B Preferred Stock and warrants to
purchase 250,000 shares of Common Stock, subject to adjustment,
and received 2,620 shares of Amended Series B Preferred Stock in
payment of all accrued and unpaid dividends on the shares of
Series B Preferred Stock exchanged by them.
Series E Preferred Stock
------------------------
During the third quarter of 1995 and first quarter of
1996, the Company completed a private placement of up to an
aggregate of 50,000 shares of a new series of Preferred Stock
designated the Series E, Cumulative Convertible Preferred Stock,
$1.00 par value per share ("Series E Preferred Stock"). The
Company placed 44,129 shares of Series E Preferred Stock for
which it received approximately $1.9 million in cash and 2.8
million shares of its unregistered Common stock valued at $1.4
million in consideration. During 1996, the Company issued 2,525
shares of Series E Preferred Stock in payment of the December 31,
1995 and June 30, 1996 dividends. During 1997, the Company
issued 5,261 shares of Series E Preferred Stock in payment of the
December 31, 1996 and June 30, 1997 dividends. Effective
November 10, 1997, the Company recapitalized and combined the
Series E Preferred Stock into an aggregate of 63,706 shares of
Amended Series A Preferred Stock (including accrued and unpaid
dividends paid in kind).
Series F Preferred Stock
------------------------
In December 1996, XCL authorized the issuance of up to
50,000 shares of a new series of Preferred Stock designated the
Series F, Cumulative Convertible Preferred Stock, $1.00 par value
per share ("Series F Preferred Stock") to two existing
stockholders of XCL. During February 1997, the Company issued a
total of 21,057 shares of Series F Preferred Stock to Mitch
Leigh, Abby Leigh and Arthur Rosenbloom in consideration of
$225,000, assignment of 1,408,125 shares of Common Stock and
2,500,000 warrants to purchase Common Stock and the release by
the purchasers of certain claims against the Company arising from
the Company's inability to perform under the terms of existing
agreements. Each share of Series F Preferred Stock is
convertible into 400 shares of Common Stock. In July 1997, the
Company issued 1,261 shares of Series F Preferred Stock in
payment of the June 30, 1997 dividends. In January 1998, the
forced conversion feature of the Series F Preferred Stock was
amended and effective January 16, 1998, the Company exercised its
right to force conversion of the Series F Preferred Stock into
633,893 (post split) shares of Common Stock including accrued and
unpaid dividends thereon.
All of the aforementioned securities were issued in
transactions intended to qualify for an exemption from
registration under the Securities Act afforded by Section 4(2)
thereof and Regulation D and/or Regulation S promulgated
thereunder.
Item 16. Exhibits and Financial Schedules
The following instruments and documents are included as
Exhibits to this Registration Statement. Exhibits incorporated
by reference are so indicated by parenthetical information.
Exhibit No. Exhibit
3.1 Amended and Restated Certificate of Incorporation of the
Company. (S)(i)
3.2 Amended and Restated By-Laws of the Company. (A)(i)
4.1 Forms of Common Stock Certificates. (R)(i)
4.2 Form of Warrant dated January 31, 1994 to purchase
2,500,000 shares of Common Stock at an exercise price of
$1.00 per share, subject to adjustment, issued to INCC.
(D)(i)
4.3 Form of Registrar and Stock Transfer Agency Agreement,
effective March 18, 1991, entered into between the Company
and Manufacturers Hanover Trust Company (predecessor to
Chemical Bank), whereby Chemical Bank (now known as
ChaseMellon Shareholder Services) serves as the Company's
Registrar and U.S. Transfer Agent. (E)
4.4 Copy of Warrant Agreement and Stock Purchase Warrant
dated March 1, 1994 to purchase 500,000 shares of Common
Stock at an exercise price of $1.00 per share, subject to
adjustment, issued to EnCap Investments, L.C. (D)(ii)
4.5 Copy of Warrant Agreement and form of Stock Purchase
Warrant dated March 1, 1994 to purchase an aggregate 600,000
shares of Common Stock at an exercise price of $1.00 per
share, subject to adjustment, issued to principals of San
Jacinto Securities, Inc. in connection with its financial
consulting agreement with the Company. (D)(iii)
4.6 Form of Warrant Agreement and Stock Purchase Warrant
dated April 1, 1994, to purchase an aggregate 6,440,000
shares of Common Stock at an exercise price of $1.25 per
share, subject to adjustment, issued to executives of the
Company surrendering all of their rights under their
employment contracts with the Company. (C)(i)
4.7 Form of Warrant Agreement and Stock Purchase Warrant
dated April 1, 1994, to purchase an aggregate 878,900 shares
of Common Stock at an exercise price of $1.25 per share,
subject to adjustment, issued to executives of the Company
in consideration for salary reductions sustained under their
employment contracts with the Company. (C)(ii)
4.8 Form of Warrant Agreement and Stock Purchase Warrant
dated April 1, 1994, to purchase 200,000 shares of Common
Stock at an exercise price of $1.25 per share, subject to
adjustment, issued to Thomas H. Hudson. (C)(iii)
4.9 Form of Warrant Agreement and Stock Purchase Warrant
dated May 25, 1994, to purchase an aggregate 100,000 shares
of Common Stock at an exercise price of $1.25 per share,
subject to adjustment, issued to the holders of Purchase
Notes B, in consideration of amendment to payment terms of
such Notes. (C)(iv)
4.10 Form of Warrant Agreement and Stock Purchase Warrant
dated May 25, 1994, to purchase an aggregate 100,000 shares
of Common Stock at an exercise price of $1.25 per share,
subject to adjustment, issued to the holders of Purchase
Notes B, in consideration for the granting of an option to
further extend payment terms of such Notes. (C)(v)
4.11 Form of Purchase Agreement between the Company and each
of the Purchasers of Units in the Regulation S Unit Offering
conducted by Rauscher Pierce & Clark with closings as
follows:
December 22, 1995 116 Units
March 8, 1996 34 Units
April 23, 1996 30 Units (J)(i)
4.12 Form of Warrant Agreement between the Company and each
of the Purchasers of Units in the Regulation S Unit Offering
conducted by Rauscher Pierce & Clark, as follows:
Closing Date Warrants Exercise Price
------------ -------- ---------------
December 22, 1995 6,960,000 $.50
March 8, 1996 2,040,000 $.35
April 23, 1996 1,800,000 $.35 (J)(ii)
4.13 Form of Warrant Agreement between the Company and
Rauscher Pierce & Clark in consideration for acting as
placement agent in the Regulation S Units Offering, as
follows:
Closing Date Warrants Exercise Price
------------ -------- ---------------
December 22, 1995 696,000 $.50
March 8, 1996 204,000 $.35
April 23, 1996 180,000 $.35 (J)(iii)
4.14 Form of a series of Stock Purchase Warrants issued to
Janz Financial Corp. Ltd. dated August 14, 1996, entitling
the holders thereof to purchase up to 3,080,000 shares of
Common Stock at $0.25 per share on or before August 13,
2001. (M)(i)
4.15 Stock Purchase Agreement between the Company and
Provincial Securities Ltd. dated August 16, 1996, whereby
Provincial purchased 1,500,000 shares of Common Stock in a
Regulation S transaction. (M)(ii)
4.16 Stock Purchase Warrant issued to Terrenex Acquisitions
Corp. dated August 16, 1996, entitling the holder thereof to
purchase up to 3,000,000 shares of Common Stock at $0.25 per
share on or before December 31, 1998. (M)(iii)
4.17 Form of a series of Stock Purchase Warrants dated
November 26, 1996, entitling the following holders thereto
to purchase up to 2,666,666 shares of Common Stock at $0.125
per share on or before December 31, 1999:
Warrant Holder Warrants
-------------- --------
Opportunity Associates, L.P. 133,333
Kayne Anderson Non-Traditional Investments, L.P. 666,666
Arbco Associates, L.P. 800,000
Offense Group Associates, L.P. 333,333
Foremost Insurance Company 266,667
Nobel Insurance Company 133,333
Evanston Insurance Company 133,333
Topa Insurance Company 200,000 (N)(i)
4.18 Form of a series of Stock Purchase Warrants dated
December 31, 1996 (2,128,000 warrants) and January 8, 1997
(2,040,000 warrants) to purchase up to an aggregate of
4,168,000 shares of Common Stock at $0.125 per share on or
before August 13, 2001. (N)(ii)
4.19 Form of Stock Purchase Warrants dated February 6, 1997,
entitling the following holders to purchase an aggregate of
1,874,467 shares of Common Stock at $0.25 per share on or
before December 31, 1999:
Warrant Holder Warrants
-------------- --------
Donald A. and Joanne R. Westerberg 241,660
T. Jerald Hanchey 1,632,807 (N)(iii)
4.20 Form of a series of Stock Purchase Warrants dated April
10, 1997, issued as a part of a unit offered with Unsecured
Notes of XCL-China Ltd., exercisable at $0.01 per share on
or before April 9, 2002, entitling the following holders to
purchase up to an aggregate of 10,092,980 shares of Common
Stock:
Warrant Holder Warrants
-------------- --------
Kayne Anderson Offshore L.P. 651,160
Offense Group Associates, L.P. 1,627,900
Kayne Anderson Non-Traditional Investments, L.P. 1,627,900
Opportunity Associates, L.P. 1,302,320
Arbco Associates, L.P. 1,627,900
J. Edgar Monroe Foundation 325,580
Estate of J. Edgar Monroe 976,740
Boland Machine & Mfg. Co., Inc. 325,580
Construction Specialists, Inc. d/b/a Con-Spec, Inc. 1,627,900 (N)(iv)
4.21 Form of Purchase Agreement dated May 13, 1997, between
the Company and Jefferies & Company, Inc. (the "Initial
Purchaser") with respect to 75,000 Units each consisting of
$1,000 principal amount of 13.5% Senior Secured Notes due
May 1, 2004, Series A and one warrant to purchase 1,280
shares of the Company's Common Stock with an exercise price
of $0.2063 per share ("Note Warrants"). (O)(i)
4.22 Form of Purchase Agreement dated May 13, 1997, between
the Company and Jefferies & Company, Inc. (the "Initial
Purchaser") with respect to 294,118 Units each consisting of
one share of Amended Series A, Cumulative Convertible
Preferred Stock ("Amended Series A Preferred Stock") and one
warrant to purchase 327 shares of the Company's Common Stock
with an exercise price of $0.2063 per share ("Equity
Warrants"). (O)(ii)
4.23 Form of Warrant Agreement and Warrant Certificate dated
May 20, 1997, between the Company and Jefferies & Company,
Inc., as the Initial Purchaser, with respect to the Note
Warrants. (O)(iii)
4.24 Form of Warrant Agreement and Warrant Certificate dated
May 20, 1997, between the Company and Jefferies & Company,
Inc., as the Initial Purchaser, with respect to the Equity
Warrants. (O)(iv)
4.25 Form of Designation of Amended Series A Preferred Stock
dated May 19, 1997. (O)(v)
4.26 Form of Amended Series A Preferred Stock certificate.
(O)(vi)
4.27 Form of Global Unit Certificate for 75,000 Units
consisting of 13.5% Senior Secured Notes due May 1, 2004 and
Warrants to Purchase Shares of Common Stock. (O)(vii)
4.28 Form of Global Unit Certificate for 293,765 Units
consisting of Amended Series A Preferred Stock and Warrants
to Purchase Shares of Common Stock. (O)(viii)
4.29 Form of Warrant Certificate dated May 20, 1997, issued
to Jefferies & Company, Inc., with respect to 12,755
warrants to purchase shares of Common Stock of the Company
at an exercise price of $0.2063 per share. (O)(ix)
4.30 Form of Stock Purchase Agreement dated effective as of
October 1, 1997, between the Company and William Wang,
whereby the Company issued 800,000 shares of Common Stock to
Mr. Wang, as partial compensation pursuant to a Consulting
Agreement. (Q)(i)
4.31 Form of Stock Purchase Warrants dated effective as of
February 20, 1997, issued to Mr. Patrick B. Collins with
respect to 200,000 warrants to purchase shares of Common
Stock of the Company at an exercise price of $0.25 per
share, issued as partial compensation pursuant to a
Consulting Agreement. (Q)(ii)
4.32 Certificate of Amendment to the Certificate of
Designation of Series F, Cumulative Convertible Preferred
Stock dated January 6, 1998. (R)(ii)
4.33 Form of Stock Purchase Warrants dated January 16, 1998,
issued to Arthur Rosenbloom (6,389), Abby Leigh (12,600) and
Mitch Leigh (134,343) to purchase shares of Common Stock of
the Company at an exercise price of $0.15 per share, on or
before December 31, 2001. (R)(iii)
4.34 Certificate of Designation of Amended Series B,
Cumulative Convertible Preferred Stock dated March 4, 1998.
(R)(iv)
4.35 Correction to Certificate of Designation of Amended
Series B, Cumulative Convertible Preferred Stock dated
March 5, 1998. (R)(v)
4.36 Second Correction to Certificate of Designation of
Amended Series B Preferred Stock dated March 19, 1998.
(R)(vi)
4.37 Form of Stock certificate representing shares of Amended
Series B Preferred Stock. (S)(ii)
4.38 Form of Agreement dated March 3, 1998 between the
Company and Arbco Associates, L.P., Kayne Anderson Non-
Traditional Investments, L.P., Offense Group Associates,
L.P. and Opportunity Associates, L.P. for the exchange of
Series B Preferred Stock and associated warrants into
Amended Series B Preferred Stock and warrants. (S)(iii)
4.39 Form of Stock Purchase Warrants dated March 3, 1998
between the Company and the following entities:
Holder Warrants
------ --------
Arbco Associates, L.P. 85,107
Kayne Anderson Non-Traditional Investments, L.P. 79,787
Offense Group Associates, L.P. 61,170
Opportunity Associates, L.P. 23,936 (S)(iv)
5.1 Opinion of Satterlee Stephens Burke & Burke LLP (to be
filed by Amendment).
10.1 Contract for Petroleum Exploration, Development and
Production on Zhao Dong Block in Bohai Bay Shallow Water Sea
Area of The People's Republic of China between China
National Oil and Gas Exploration and Development Corporation
and XCL - China, Ltd., dated February 10, 1993. (B)
10.2 Form of Net Revenue Interest Assignment dated February
23, 1994, between the Company and the purchasers of the
Company's Series D, Cumulative Convertible Preferred Stock.
(D)(iv)
10.3 Modification Agreement for Petroleum Contract on Zhao
Dong Block in Bohai Bay Shallow Water Sea Area of The
People's Republic of China dated March 11, 1994, between the
Company, China National Oil and Gas Exploration and
Development corporation and Apache China Corporation LDC.
(D)(v)
10.4 Consulting agreement between the Company and Sir Michael
Palliser dated April 1, 1994. (F)(i)
10.5 Consulting agreement between the Company and Mr. Arthur
W. Hummel, Jr. dated April 1, 1994. (F)(ii)
10.6 Letter of Intent between the Company and CNPC United
Lube Oil Corporation for a joint venture for the manufacture
and sale of lubricating oil dated January 14, 1995. (G)(i)
10.7 Farmout Agreement dated May 10, 1995, between XCL China
Ltd., a wholly owned subsidiary of the Company and Apache
Corporation whereby Apache will acquire an additional
interest in the Zhao Dong Block, Offshore People's Republic
of China. (G)(ii)
10.8 Modification Agreement of Non-Negotiable Promissory
Note and Waiver Agreement between Lutcher & Moore
Cypress Lumber Company and L.M. Holding Associates, L.P.
dated June 15, 1995. (H)(i)
10.9 Third Amendment to Credit Agreement between Lutcher-
Moore Development Corp., Lutcher & Moore Cypress Lumber
Company, The First National Bank of Lake Charles, Mary
Elizabeth Mecom, The Estate of John W. Mecom, The Mary
Elizabeth Mecom Irrevocable Trust, Matilda Gray Stream, The
Opal Gray Trust, Harold H. Stream III, The
Succession of Edward M. Carmouche, Virginia Martin
Carmouche and L.M. Holding Associates, L.P. dated June 15,
1995. (H)(ii)
10.10 Second Amendment to Appointment of Agent for
Collection and Agreement to Application of Funds between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, L.M. Holding Associates, L.P. and The
First National Bank of Lake Charles, dated June 15,
1995. (H)(iii)
10.11 Contract of Chinese Foreign Joint Venture dated July
17, 1995, between United Lube Oil Corporation and XCL
China Ltd. for the manufacturing and selling of
lubricating oil and related products. (H)(iv)
10.12 Letter of Intent dated July 17, 1995 between CNPC
United Lube Oil Corporation and XCL Ltd. for discussion of
further projects. (H)(v)
10.13 Copy of Letter Agreement dated March 31, 1995, between
the Company and China National Administration of Coal
Geology for the exploration and development of coal bed
methane in Liao Ling Tiefa and Shanxi Hanchang Mining
Areas. (I)(i)
10.14 Memorandum of Understanding dated December 14, 1995,
between XCL Ltd. and China National Administration of Coal
Geology. (J)(iv)
10.15 Form of Fourth Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles,
Mary Elizabeth Mecom, The Estate of John W. Mecom, The
Mary Elizabeth Mecom Irrevocable Trust, Matilda Gray
Stream, The Opal Gray Trust, Harold H. Stream III, The
Succession of Edward M. Carmouche, Virginia Martin
Carmouche and L.M. Holding Associates, L.P. dated January
16, 1996. (J)(v)
10.16 Form of Third Amendment to Appointment of Agent for
Collection and Agreement to application of Funds between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, L.M. Holding Associates, L.P. and The
First National Bank of Lake Charles, dated January 16,
1996. (J)(vi)
10.17 Copy of Purchase and Sale Agreement dated March 8,
1996, between XCL-Texas, Inc. and Tesoro E&P Company, L.P.
for the sale of the Gonzales Gas Unit located in south
Texas. (J)(vii)
10.18 Copy of Limited Waiver between the Company and
Internationale Nederlanden (U.S.) Capital Corporation
dated April 3, 1996. (J)(viii)
10.19 Copy of Purchase and Sale Agreement dated April 22,
1996, between XCL-Texas, Inc. and Dan A. Hughes Company
for the sale of the Lopez Gas Units located in south Texas.
(K)
10.20 Form of Sale of Mineral Servitude dated June 18, 1996,
whereby the Company sold its 75 percent mineral interest in
the Phoenix Lake Tract to the Stream Family Limited Partners
and Virginia Martin Carmouche Gayle. (L)(i)
10.21 Form of Fifth Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles,
Mary Elizabeth Mecom, The Estate of John W. Mecom, The
Mary Elizabeth Mecom Irrevocable Trust, Matilda Gray
Stream, The Opal Gray Trust, Harold H. Stream III, The
Succession of Edward M. Carmouche, Virginia Martin
Carmouche and L.M. Holding Associates, L.P. dated August
8, 1996. (N)(v)
10.22 Form of Assignment and Sale between XCL Acquisitions,
Inc. and purchasers of an interest in certain promissory
notes held by XCL Acquisitions, Inc. as follows:
<TABLE>
<CAPTION>
Date Purchaser Principal Amount Purchase Price
---- --------- ---------------- --------------
<S> <C> <C> <C>
November 19, 1996 Opportunity Associates, L.P. $15,627.39 $ 12,499.98
November 19, 1996 Kayne Anderson Non-Traditional
Investments, L.P. $78,126.36 $ 62,499.98
November 19, 1996 Offense Group Associates, L.P. $39,063.18 $ 31,249.99
November 19, 1996 Arbco Associates, L.P. $93,743.14 $ 75,000.04
November 19, 1996 Nobel Insurance Company $15,627.39 $ 12,499.98
November 19, 1996 Evanston Insurance Company $15,627.39 $ 12,499.98
November 19, 1996 Topa Insurance Company $23,435.79 $ 18,750.01
November 19, 1996 Foremost Insurance Company $31,249.48 $ 25,000.04
February 10, 1997 Donald A. and Joanne R. Westerberg $25,000.00 $ 28,100.00
February 10, 1997 T. Jerald Hanchey $168,915.74 $189,861.29
(N)(vi)
</TABLE>
10.23 Form of Sixth Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles, The
Estate of Mary Elizabeth Mecom, The Estate of John W.
Mecom, The Mary Elizabeth Mecom Irrevocable Trust,
Matilda Gray Stream, The Opal Gray Trust, Harold H.
Stream III, The Succession of Edward M. Carmouche,
Virginia Martin Carmouche and L.M. Holding Associates,
L.P. dated January 28, 1997. (N)(vii)
10.24 Form of Act of Sale between the Company and The
Schumacher Group of Louisiana, Inc. dated March 31, 1997,
where in the Company sold its office building. (N)(viii)
10.25 Amendment No. 1 to the May 1, 1995 Agreement with
Apache Corp. dated April 3, 1997, effective December 13,
1996. (N)(ix)
10.26 Form of Guaranty dated April 9, 1997 by XCL-China Ltd.
in favor of ING (U.S.) Capital Corporation executed in
connection with the sale of certain Unsecured Notes issued
by XCL-China Ltd. (N)(x)
10.27 Form of First Amendment to Stock Pledge Agreement dated
April 9, 1997, between the Company and ING (U.S.) Capital
Corporation adding XCL Land Ltd. to the Stock Pledge
Agreement dated as of January 31, 1994. (N)(xi)
10.28 Form of Agreement dated April 9, 1997, between ING
(U.S.) Capital Corporation, XCL-China and holders of the
Senior Unsecured Notes, subordinating the Guaranty granted
by XCL-China in favor of ING to the Unsecured Notes.
(N)(xii)
10.29 Form of Forbearance Agreement dated April 9, 1997
between the Company and ING (U.S.) Capital Corporation.
(N)(xiii)
10.30 Form of a series of Unsecured Notes dated April 10,
1997, between the Company and the following entities:
Note Holder Principal Amount
----------- ----------------
Kayne Anderson Offshore, L.P. $200,000
Offense Group Associates, L.P. $500,000
Kayne Anderson Non-Traditional Investments, L.P. $500,000
Opportunity Associates, L.P. $400,000
Arbco Associates, L.P. $500,000
J. Edgar Monroe Foundation $100,000
Estate of J. Edgar Monroe $300,000
Boland Machine & Mfg. Co., Inc. $100,000
Construction Specialists, Inc. d/b/a Con-Spec, Inc. $500,000 (N)(xiv)
10.31 Form of Subscription Agreement dated April 10, 1997, by
and between XCL-China, Ltd., the Company and the subscribers
of Units, each unit comprised of $100,000 in Unsecured Notes
and 325,580 warrants. (N)(xv)
10.32 Form of Intercompany Subordination Agreement dated
April 10, 1997, between the Company, XCL-Texas, Ltd., XCL
Land Ltd., The Exploration Company of Louisiana, Inc., XCL-
Acquisitions, Inc., XCL-China Coal Methane Ltd., XCL-China
LubeOil Ltd., XCL-China Ltd., and holders of the Unsecured
Notes. (N)(xvi)
10.33 Form of Indenture dated as of May 20, 1997, between the
Company, as Issuer and Fleet National Bank, as Trustee
("Indenture"). (O)(x)
10.34 Form of 13.5% Senior Secured Note due May 1, 2004,
Series A issued May 20, 1997 to Jefferies & Company, Inc. as
the Initial Purchaser (Exhibit A to the Indenture). (O)(xi)
10.35 Form of Pledge Agreement dated as of May 20, 1997,
between the Company and Fleet National Bank, as Trustee
(Exhibit C to the Indenture). (O)(xii)
10.36 Form of Cash Collateral and Disbursement Agreement
dated as of May 20, 1997, between the Company and Fleet
National Bank, as Trustee and Disbursement Agent, and Herman
J. Schellstede & Associates, Inc., as Representative
(Exhibit F to the Indenture). (O)(xiii)
10.37 Form of Intercreditor Agreement dated as of May 20,
1997, between the Company, ING (U.S.) Capital Corporation,
the holders of the Secured Subordinated Notes due April 5,
2000 and Fleet National Bank, as trustee for the holders of
the 13.5% Senior Secured Notes due May 1, 2004 (Exhibit G to
the Indenture). (O)(xiv)
10.38 Registration Rights Agreement dated as of May 20, 1997,
by and between the Company and Jefferies & Company, Inc.
with respect to the 13.5% Senior Secured Notes due May 1,
2004 and 75,000 Common Stock Purchase Warrants (Exhibit H to
the Indenture). (O)(xv)
10.39 Form of Security Agreement, Pledge and Financing
Statement and Perfection Certificate dated as of May 20,
1997, by the Company in favor of Fleet National Bank, as
Trustee (Exhibit I to the Indenture). (O)(xvi)
10.40 Registration Rights Agreement dated as of May 20, 1997,
by and between the Company and Jefferies & Company, Inc.
with respect to the 9.5% Amended Series A Preferred Stock
and Common Stock Purchase Warrants. (O)(xvii)
10.41 Form of Restated Forbearance Agreement dated effective
as of May 20, 1997, between the Company, XCL-Texas, Inc. and
ING (U.S.) Capital Corporation. (O)(xviii)
10.42 Form of Seventh Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles, The
Estate of Mary Elizabeth Mecom, The Estate of John W.
Mecom, The Mary Elizabeth Mecom Irrevocable Trust,
Matilda Gray Stream, The Opal Gray Trust, Harold H.
Stream III, The Succession of Edward M. Carmouche,
Virginia Martin Carmouche and L.M. Holding Associates,
L.P. dated May 8, 1997. (P)(i)
10.43 Form of Eighth Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles, The
Estate of Mary Elizabeth Mecom, The Estate of John W.
Mecom, The Mary Elizabeth Mecom Irrevocable Trust,
Matilda Gray Stream, The Opal Gray Trust, Harold H.
Stream III, The Succession of Edward M. Carmouche,
Virginia Martin Carmouche and L.M. Holding Associates,
L.P. dated July 29, 1997. (P)(ii)
10.44 Form of Consulting Agreement dated February 20, 1997,
between the Company and Mr. Patrick B. Collins, whereby Mr.
Collins performs certain accounting advisory services.
(Q)(ii)
10.45 Form of Consulting Agreement dated effective as of June
1, 1997, between the Company and Mr. R. Thomas Fetters, Jr.,
a director of the Company, whereby Mr. Fetters performs
certain geological consulting services. (Q)(iii)
10.46 Form of Agreement dated October 1, 1997, between the
Company and Mr. William Wang, whereby Mr. Wang performs
certain consulting services with respect to its investments
in China. (Q)(iv)
10.47 Form of Services Agreement dated August 1, 1997,
between the Company and Mr. Benjamin B. Blanchet, an officer
of the Company. (Q)(v)
10.48 Form of Promissory Note dated August 1, 1997, in a
principal amount of $100,000, made by Mr. Benjamin B.
Blanchet in favor of the Company. (Q)(vi)
21.1 Subsidiaries of the Company
XCL-China Ltd.
XCL-China LubeOil Ltd.
XCL-China Coal Methane Ltd.
XCL-Texas, Inc.
XCL-Acquisitions, Inc.
The Exploration Company of Louisiana, Inc.
XCL Land Ltd.
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of H.J. Gruy and Associates, Inc.*
23.3 Consent of Satterlee Stephens Burke & Burke LLP
(included in Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of
this Registration Statement)
99.1 Form of Letter of Transmittal
_________________________
*Filed herewith.
(A) Incorporated by reference to the Registration Statement
on Form 8-B filed on July 28, 1988, where it appears as
Exhibits 3(c).
(B) Incorporated by reference to a Registration Statement on
Form S-3 (File No. 33-68552) where it appears as Exhibit
10.1.
(C) Incorporated by reference to Post-Effective Amendment No.
2 to Registration Statement on Form S-3 (File No. 33-68552)
where it appears as: (i) Exhibit 4.29; (ii) Exhibit 4.30;
and (iii) through (v) Exhibits 4.34 through 4.36,
respectively.
(D) Incorporated by reference to Amendment No. 1 to Annual
Report on Form 10-K filed April 15, 1994, where it appears
as: (i) Exhibit 4.32; (ii) Exhibit 4.36; (iii) Exhibit
4.37; (iv) through (v) Exhibit 10.41 through Exhibit 10.47,
respectively; and (v) Exhibit 10.49.
(E) Incorporated by reference to an Annual Report on Form 10K
for the fiscal year ended December 31, 1990, filed April 1,
1991, where it appears as Exhibit 10.27.
(F) Incorporated by reference to Amendment No. 1 to an Annual
Report on Form 10-K/A No. 1 for the fiscal year ended
December 31, 1994, filed April 17, 1995, where it appears
as: (i) through (ii) Exhibits 10.22 through 10.23,
respectively.
(G) Incorporated by reference to Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, filed May
15, 1995, where it appears as: (i) Exhibit 10.26; and (ii)
Exhibit 10.28.
(H) Incorporated by reference to Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, filed August 14,
1995, where it appears as: (i) through (v) Exhibits 10.29
through 10.33, respectively.
(I) Incorporated by reference to Quarterly Report on Form
10-Q for the quarter ended September 30, 1995, filed
November 13, 1995, where it appears as Exhibit 10.35.
(J) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1995, filed April 15, 1996,
where it appears as: (i) through (iii) Exhibits 4.28
through 4.30, respectively; and (iv) Exhibit 10.31 and
(v) through (vii) Exhibits 10.33 through 10.36,
respectively.
(K) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended March 31, 1996, filed May 15, 1996,
where it appears as Exhibit 10.37.
(L) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended June 30, 1996, filed August 14,
1996, where it appears as Exhibit 10.38.
(M) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended September 30, 1996, filed November
14, 1996, where it appears as (i) through (iii) Exhibits
4.32 through 4.34.
(N) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1996, filed April 15, 1997,
where it appears as (i) through (iii) Exhibits 4.35 through
4.38; (iv) Exhibit 4.40; and (v) through (xvi) Exhibits
10.39 through 10.50.
(O) Incorporated by reference to Current Report on Form 8-K
dated May 20, 1997, filed June 3, 1997, where it appears as
(i) through (ix) Exhibits 4.1 through 4.9 and (x) through
(xviii) Exhibits 10.51 through 10.59.
(P) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997, filed August 14,
1997, where it appears as (i) and (ii) Exhibits 10.60 and
10.61.
(Q) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997, filed November
14, 1997, where it appears as (i) Exhibit 4.52; and (ii)
through (vi) Exhibits 10.61 through 10.66.
(R) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1997, filed April 15, 1998,
where it appears as (i) Exhibit 4.1; (ii) through (vi)
Exhibits 4.32 through 4.36, respectively.
(S) Incorporated by reference to Amendment No. 1 to Annual
Report on Form 10-K for the year ended December 31, 1997,
filed April 22, 1998, where it appears as (i) Exhibit 3.1;
and (ii) through (iv) Exhibits 4.37 through 4.39,
respectively.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and prior represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the undersigned registrant pursuant to
the provisions described under Item 14 above, or otherwise, the
undersigned registrant has been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the undersigned registrant of expenses incurred or paid by a
director, officer or controlling person of the undersigned
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
undersigned registrant will, unless, in the opinion of its
counsel, the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the Company has duly caused this Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Lafayette, State of Louisiana on
the 5th day of May, 1998.
XCL LTD.
/s/ Marsden W. Miller, Jr.
By:___________________________
Marsden W. Miller, Jr.
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Marsden W.
Miller, Jr. and Benjamin B. Blanchet, and each of them (with full
power to each of them to act alone), his true and lawful attorney-
in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign on his behalf individually and in
each capacity stated below any and all amendments (including post-
effective amendments) to this Registration Statement, and to file
the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents and either of them, or
their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Marsden W. Miller, Jr.
- --------------------------
Marsden W. Miller, Jr. Chairman of the Board and Chief
Executive Officer
(principal executive officer) May 5, 1998
/s/ John T. Chandler
- -------------------------
John T. Chandler Vice Chairman of the Board May 5, 1998
/s/ Benjamin B. Blanchet
- -------------------------
Benjamin B. Blanchet Executive Vice President and
Director May 5, 1998
/s/ Steven B. Toon
- -------------------------
Steven B. Toon Chief Financial Officer
(chief accounting officer) May 5, 1998
/s/ R. Thomas Fetters, Jr.
________________________
R. Thomas Fetters, Jr. Director May 5, 1998
/s/ Fred Hofheinz
- -------------------------
Fred Hofheinz Director May 5, 1998
/s/ Francis J. Reinhardt, Jr.
- -----------------------------
Francis J. Reinhardt, Jr. Director May 5, 1998
/s/ Arthur W. Hummel, Jr.
- --------------------------
Arthur W. Hummel, Jr. Director May 5, 1998
/s/ Michael Palliser
- --------------------------
Sir Michael Palliser Director May 5, 1998
- --------------------------
Peter F. Ross Director ______, 1998
APPENDIX A
H.J. GRUY AND ASSOCIATES, INC.
1200 Smith Street, Suite 3040, Houston, Texas 77002 o FAX
(713) 739-6112 o (713) 739-1000
April 9, 1998
XCL, Ltd.
110 Rue Jean Lafitte
Lafayette, Louisiana 70508
Proved Reserves
Zhao Dong Block, China
98-202-104
Gentlemen:
At your request, we estimated the proved reserves and
future net cash flow as of January 1, 1998, attributable to
interests owned by XCL, Ltd. in the Zhao Dong Block, Bohai
Bay, China.
The estimated reserves, future net cash flow and
discounted future net cash flow are summarized by
reserve category as follows:
Estimated Estimated
Net Reserves Future Net Cash Flow
------------- ---------------------------
Discounted Oil
at 10% (Barrels) Nondiscounted Per Year
--------- ------------- -----------
Proved Undeveloped 11,762,000 $ 129,105,000 $ 55,031,000
Apache Payment -0- $ 8,974,000 $ 7,416,000
----------- ------------ ----------
Total Proved 11,762,000 $ 138,079,000 $ 62,447,000
========== ============ ===========
The Apache Payment reflects an agreement by Apache
China Corporation LDC to pay XCL - China Ltd. sixteen and
two-thirds percent (16 2/3%) of the value of the Foreign
Contractor's share of the recoverable proved reserves in
the Producing Unit(s) located in the C field through the
Minghuazhen.
The discounted future net cash flows summarized in the
above table are computed using a discount rate of 10 percent
per annum.
Proved reserves are estimated in accordance with the
definitions contained in Securities and Exchange Commission
Regulation S-X, Rule 4-10 (a). The definitions are
included in part as
Attachment I.
Future net cash flow as presented herein is defined as the
future cash inflow attributable to the evaluated interest
in accordance with the production sharing agreement with
the Chinese National Oil and Gas Exploration and
Development Corporation (CNODC). Future costs of
abandoning the facilities and wells, and the restoration
of producing properties to satisfy environmental
standards are not deducted from the cash flow.
Estimates of future net cash flow and discounted future net
cash flow are not to be interpreted to represent the fair
market value for the estimated reserves. The estimated
reserves included in this report have not been adjusted for
risk.
For the economic forecasts presented in this report, the
oil prices are held constant at the initial value. Direct
operating costs and future capital expenditures are not
escalated and therefore remain constant for the
projected life of each property.
In conducting this evaluation, we relied on data supplied by
XCL, Ltd. The extent and character of ownership, oil
prices, direct operating costs, future capital
expenditures, accounting, geological, and engineering
data were accepted as represented. The development schedule
for currently undeveloped properties was supplied by XCL,
Ltd. No independent well tests, property inspections,
or audits of operating expenses were conducted by our
staff in conjunction with this evaluation. We did not
verify or determine the extent, character, status, or
liability, if any, of any current or possible future
detrimental environmental conditions.
Reserve estimates for these undeveloped reserves are
based on volumetric calculations and analogy with the
performance of comparable wells. Reserves estimates from
volumetric methods and from analogy comparisons are often
less certain than reserve estimates based on well
performance obtained over a period during which a
substantial portion of the reserve was produced. The
reserves reported herein are estimates only and should
not be construed as exact quantities. Future conditions
may affect recovery of estimated reserves and cash flows,
and reserves of all categories may be subject to revision
as more performance data become available.
In order to estimate the reserves, costs, and future cash
flows shown in this report, we have relied in part on
geological, engineering, and economic data furnished by our
client. Although we have made a best efforts attempt to
acquire all pertinent data and to analyze it carefully
with methods accepted by the petroleum industry, there
is no guarantee that the volumes of oil or the cash flows
projected will be realized. The reserve and cash flow
projections presented in this report may require
revision as additional data become available.
If investments or business decisions are to be made in
reliance on these estimates by anyone other than our
client, such person, with the approval of our client, is
invited to visit our offices at his expense so that he can
evaluate the assumptions made and the completeness and
extent of the data available on which our estimates are
based.
Any distribution or publication of this report or any part
thereof must include this letter in its entirety.
Yours very truly,
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
James H. Hartsock, Ph.D., P.E.
Executive Vice President
/s/ Tommy Elkins
Tommy Elkins
Petroleum Consultant
JHH:akr
Attachment
<PAGE>
ATTACHMENT I
DEFINITIONS OF PROVED OIL AND GAS RESERVES (1)
Proved Oil and Gas Reserves
- ----------------------------
Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas, and natural gas liquid which
geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes
in existing prices provided only by contractual
arrangements, but not on escalations based upon
future conditions.
Reservoirs are considered proved if economic
producibility is supported by either actual production
or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts,
if any, and (B) the immediately adjoining portions not
yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological
and engineering data. In the absence of information
on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the
reservoir.
Reserves which can be produced economically through
application of improved recovery techniques (such as fluid
injection) are included in the "proved" classification
when successful testing by a pilot project, or the
operation of an installed program in the reservoir,
provides support for the engineering analysis on which the
project or program was based.
Estimates of proved reserves do not include the following:
(A) oil that may become available from known reservoirs
but is classified separately as "indicated additional
reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; c crude oil, natural
gas, and natural gas liquids, that may occur in
undrilled prospects; and (D) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil
shales, coal, gilsonite and other such sources.
Proved Developed Oil and Gas Reserves
- -------------------------------------
Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells
with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the
application of fluid injection or other improved recovery
techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as
"proved developed reserves" only after testing by a pilot
project or after the operation of an installed program
has confirmed through production response that increased
recovery will be achieved.
Proved Undeveloped Reserves
- ---------------------------
Proved undeveloped oil and gas reserves are reserves that
are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves
on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of
production from the existing productive formation.
Under no circumstances should estimates for proved
undeveloped reserves be attributable to any acreage for
which an application of fluid injection or other
improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the
area and in the same reservoir.
(1) Contained in Securities and Exchange Commission Regulation
S-X, Rule 4-10 (a)
<PAGE>
XCL CHINA, LTD.
SUMMARY OF PROJECTED CASH FLOWS - VARIOUS PRELIMINARY
CASES ZHAO DONG CONCESSION
C-4 WELL: SEC CASE
- ------------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 48
TOTAL OIL REVENUES (M$) - - - 817
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - -
(714)
OPERATING EXPENSE (M$) - - -
(99)
----- ---- ---- -----
NET CASH FLOW (M$) - - - 3
===== ==== ==== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 77 30 7 -
TOTAL OIL REVENUES (M$) 1,323 509 125 -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) (207) (138) (31) -
----- ---- ---- ----
NET CASH FLOW (M$) 1,117 371 94 -
===== ==== ==== ====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
TOTALS
------
NET FLOW RATE (MBBLS) 162
TOTAL OIL REVENUES (M$) 2,774
EXPLORATION EXPENSE (M$) -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) (714)
OPERATING EXPENSE (M$) (475)
-----
NET CASH FLOW (M$) 1,585
======
C BLOCK: SEC CASE
- -----------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 214
TOTAL OIL REVENUES - - - 3,565
EXPLORATION EXPENSE (15,817) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (3,212) (8,365)
OPERATING EXPENSE - - - 424
------ ---- ----- -----
NET CASH FLOW (15,817) - (3,212) (5,223)
====== ==== ===== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 907 738 494 380
TOTAL OIL REVENUES 15,130 12,325 8,250 6,345
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,300) - - -
OPERATING EXPENSE (1,620) (1,848) (1,626) (1,452)
------ ------ ----- -----
NET CASH FLOW 9,210 10,477 6,623 4,893
====== ====== ===== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 309 255 217 191
TOTAL OIL REVENUES 5,150 4,248 3,620 3,193
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,351) (1,278) (1,227) (1,164)
----- ----- ----- -----
NET CASH FLOW 3,799 2,970 2,393 2,029
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 171 154 139 122
TOTAL OIL REVENUES 2,857 2,578 2,312 2,042
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,105) (1,052) (392) (343)
----- ----- ----- -----
NET CASH FLOW 1,752 1,527 1,921 1,699
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 111 102 73 -
TOTAL OIL REVENUES 1,860 1,699 1,221 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (916) (890) (802) -
----- ----- ----- ----
NET CASH FLOW 944 809 419 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 4,577
TOTAL OIL REVENUES 76,395
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (15,877)
OPERATING EXPENSE (17,491)
-----
NET CASH FLOW 43,028
======
D BLOCK: SEC CASE
- -----------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 330
TOTAL OIL REVENUES - - - 5,502
EXPLORATION EXPENSE (24,409) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (4,957) (12,909)
OPERATING EXPENSE - - - (654)
------ ---- ----- ------
NET CASH FLOW (24,409) - (4,957) (8,061)
====== ==== ===== ======
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 1,388 1,128 755 581
TOTAL OIL REVENUES 23,169 18,824 12,603 9,705
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (6,636) - - -
OPERATING EXPENSE (2,500) (2,851) (2,510) (2,241)
------ ------ ------ -----
NET CASH FLOW 14,033 15,973 10,093 7,464
====== ====== ====== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 471 391 334 295
TOTAL OIL REVENUES 7,869 6,519 5,579 4,928
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,085) (1,972) (1,894) (1,797)
----- ----- ----- -----
NET CASH FLOW 5,784 4,547 3,685 3,131
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 264 238 215 190
TOTAL OIL REVENUES 4,409 3,979 3,585 3,168
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,706) (1,623) (937) (863)
----- ----- ----- -----
NET CASH FLOW 2,703 2,356 2,648 2,305
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 172 157 113 -
TOTAL OIL REVENUES 2,870 2,622 1,884 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,413) (1,374) (1,238) -
----- ----- ----- ----
NET CASH FLOW 1,457 1,248 646 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 7,023
TOTAL OIL REVENUES 117,215
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (24,502)
OPERATING EXPENSE (27,658)
------
NET CASH FLOW 65,055
=======
PAYMENT: 5.9% INTEREST
- ----------------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 66
TOTAL OIL REVENUES - - - 1,258
EXPLORATION EXPENSE (1,416) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE - - - (113)
----- ---- ---- -----
NET CASH FLOW (1,416) - - 1,145
===== ==== ==== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 191 191 145 106
TOTAL OIL REVENUES 3,813 3,983 3,160 2,408
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,765) - - -
OPERATING EXPENSE (486) (554) (488) (436)
----- ----- ----- -----
NET CASH FLOW (1,437) 3,429 2,672 1,972
===== ===== ===== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 86 72 62 55
TOTAL OIL REVENUES 2,047 1,789 1,603 1,484
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (405) (384) (368) (349)
----- ----- ----- -----
NET CASH FLOW 1,642 1,405 1,235 1,135
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 50 45 4 37
TOTAL OIL REVENUES 1,407 1,333 1,265 1,174
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (332) (316) (229) (215)
----- ----- ----- -----
NET CASH FLOW 1,075 1,017 1,036 960
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 33 30 22 -
TOTAL OIL REVENUES 1,101 1,047 788 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (275) (267) (241) -
----- ----- ---- ----
NET CASH FLOW 826 780 547 -
===== ===== ==== ====
TOTALS
------
NET FLOW RATE (MBBLS) 1,231
TOTAL OIL REVENUES 29,660
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,765)
OPERATING EXPENSE (5,458)
-----
NET CASH FLOW 19,437
======
TOTAL
- -----
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 657
TOTAL OIL REVENUES - - - 9,884
EXPLORATION EXPENSE (40,226) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (8,170) (21,987)
OPERATING EXPENSE - - - (1,177)
PARTNER PAYMENT - - - -
------ ---- ----- ------
NET CASH FLOW (40,226) - (8,170) (12,624)
====== ==== ===== ======
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 2,563 2,087 1,402 1,067
TOTAL OIL REVENUES 39,622 31,658 20,978 16,050
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (10,936) - - -
OPERATING EXPENSE (4,327) (4,837) (4,167) (3,693)
PARTNER PAYMENT 8,974 - - -
------ ------ ------ ------
NET CASH FLOW 35,896 28,908 18,212 13,424
====== ====== ====== ======
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 866 717 613 542
TOTAL OIL REVENUES 13,018 10,767 9,199 8,122
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (3,436) (3,250) (3,122) (2,961)
PARTNER PAYMENT - - - -
------ ------ ----- -----
NET CASH FLOW 10,449 8,234 6,691 5,702
====== ====== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 485 438 395 349
TOTAL OIL REVENUES 7,265 6,557 5,898 5,210
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,811) (2,674) (1,329) (1,206)
PARTNER PAYMENT - - - -
----- ----- ----- -----
NET CASH FLOW 4,940 4,321 4,963 4,353
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 316 289 208 -
TOTAL OIL REVENUES 4,730 4,321 3,105 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,328) (2,264) (2,041) -
PARTNER PAYMENT - - - -
----- ----- ----- ----
NET CASH FLOW 2,718 2,346 1,273 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 12,993
TOTAL OIL REVENUES 226,044
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (45,858)
OPERATING EXPENSE (51,081)
PARTNER PAYMENT 8,974
------
NET CASH FLOW 138,079
=======
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 1 MM BBL CASE
(C-4 WELL: SEC CASE)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) 0 208 342 132 32 -
CONS IND & COMM TAX (MBBLS) 0 10 17 7 2 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 0 125 205 79 19 -
OPERATING EXPENSES (M$) - 405 843 564 125 -
OPERATING EXPENSE VOLUME (MBBLS) - 24 49 33 7 -
INVESTMENT RECOVERY OIL (MBBLS) 0 101 156 46 12 -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - 2,915 - - - -
DEVELOPMENT RECOVERY (MBBLS) - 170 - - - -
DEVELOPMENT RECOVERY UTILIZED - 101 68 6 1 -
DEVELOPMENT COST CARRYOVER (MBBLS) - 68 - - - -
DEEMED INTEREST (MBBLS) - - 6 1 - -
TOTAL COST RECOVERY OIL (MBBLS) - 101 68 6 1 -
REMAINDER OIL (MBBLS) 0 73 208 86 23 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 0 4 10 4 1 -
ALLOCABLE REMAINDER OIL (MBBLS) 0 69 197 82 22 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 34 97 40 11 -
TOTAL CONTRACTOR OIL (MBBLS) 0 95 154 59 15 -
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) - - - - - -
CONS IND & COMM TAX (MBBLS) - - - - - -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) - - - - - -
OPERATING EXPENSES (M$) - - - - - -
OPERATING EXPENSE VOLUME (MBBLS) - - - - - -
INVESTMENT RECOVERY OIL (MBBLS) - - - - - -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) - - - - - -
X FACTOR - - - - - -
CHINESE SHARE OIL (MBBLS) - - - - - -
ALLOCABLE REMAINDER OIL (MBBLS) - - - - - -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) - - - - - -
TOTAL CONTRACTOR OIL (MBBLS) - - - - - -
2010 2011 2012 2013 2014 2015
---- ----- ---- ---- ---- ----
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) - - - - - -
CONS IND & COMM TAX (MBBLS) - - - - - -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) - - - - - -
OPERATING EXPENSES (M$) - - - - - -
OPERATING EXPENSE VOLUME (MBBLS) - - - - - -
INVESTMENT RECOVERY OIL (MBBLS) - - - - - -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) - - - - - -
X FACTOR - - - - - -
CHINESE SHARE OIL (MBBLS) - - - - - -
ALLOCABLE REMAINDER OIL (MBBLS) - - - - - -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) - - - - - -
TOTAL CONTRACTOR OIL (MBBLS) - - - - - -
</TABLE>
<TABLE>
<CAPTION>
TOTALS
------
<S> <C>
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 715
CONS IND & COMM TAX (MBBLS) 36
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 429
OPERATING EXPENSES (M$) 1,937
OPERATING EXPENSE VOLUME (MBBLS) 113
INVESTMENT RECOVERY OIL (MBBLS) 316
EXPLORATION COSTS (M$) -
EXPLORATION RECOVERY (MBBLS) -
EXPLORATION RECOVERY ADJUSTMENT -
EXPLORATION RECOVERY UTILIZED -
EXPLORATION COST CARRYOVER (MBBLS) -
DEVELOPMENT COSTS (M$) 2,915
DEVELOPMENT RECOVERY (MBBLS) 170
DEVELOPMENT RECOVERY UTILIZED 177
DEVELOPMENT COST CARRYOVER (MBBLS) 68
DEEMED INTEREST (MBBLS) 7
TOTAL COST RECOVERY OIL (MBBLS) 177
REMAINDER OIL (MBBLS) 390
X FACTOR -
CHINESE SHARE OIL (MBBLS) 19
ALLOCABLE REMAINDER OIL (MBBLS) 370
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 181
TOTAL CONTRACTOR OIL (MBBLS) 323
</TABLE>
FOREIGN CONTRACTOR CASH FLOW (M$)
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
COST RECOVERY REVENUES - 1,051 989 328 66 -
ALLOCABLE REVENUES 0 582 1,658 689 183 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - (1,428) - - - -
OPERATING EXPENSE - (198) (413) (277) (61) -
----- ----- ----- ---- ---- ----
NET CASH FLOW 0 7 2,234 741 188 -
===== ===== ====== ==== ==== ====
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES - - - - - -
ALLOCABLE REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
----- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
COST RECOVERY REVENUES - - - - - -
ALLOCABLE REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
TOTALS
------
COST RECOVERY REVENUES 2,434
ALLOCABLE REVENUES 3,113
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (1,428)
OPERATING EXPENSE (949)
-----
NET CASH FLOW 3,170
=====
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 0 817 1,323 509 125 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - (714) - - - -
OPERATING EXPENSE - (99) (207) (138) (31) -
---- ---- ----- ---- ---- ----
NET CASH FLOW 0 3 1,117 371 94 -
===== ==== ===== ===== ===== ====
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
TOTAL OIL REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 2,774
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (714)
OPERATING EXPENSE (475)
-----
NET CASH FLOW 1,585
======
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 1,153
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY CASE
ZHAO DONG CONCESSION: 18 MM BBL CASE
(C BLOCK: SEC CASE)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 0 0 0 629 2,664 2,912 2,187 1,672
CONS IND & COMM TAX (MBBLS) 0 0 0 31 133 146 109 84
ROYALTY (MBBLS) - - - - - - - -
COST RECOVERY OIL (MBBLS) 0 0 0 378 1,598 1,747 1,312 1,003
OPERATING EXPENSES (M$) - - - 1,729 6,613 7,541 6,639 5,927
OPERATING EXPENSE VOLUME (MBBLS) - - - 304 396 452 398 355
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 274 1,202 1,295 915 648
EXPLORATION COSTS (M$) 31,634 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 1,895 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (89) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 274 1,202 330 - -
EXPLORATION COST CARRYOVER (MBBLS) 1,806 1,806 1,806 1,532 330 - - -
DEVELOPMENT COSTS (M$) - - 13,112 34,141 17,551 - - -
DEVELOPMENT RECOVERY (MBBLS) - - 786 2,046 1,052 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - 965 915 648
DEVELOPMENT COST CARRYOVER (MBBLS) - 7 786 2,831 3,883 2,917 2,003 1,355
DEEMED INTEREST (MBBLS) - - - 71 261 373 296 207
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 274 1,202 1,295 915 648
REMAINDER OIL (MBBLS) 0 0 0 220 932 1,019 766 585
X FACTOR 0.950 0.950 0.950 0.950 0.912 0.907 0.921 0.937
CHINESE SHARE OIL (MBBLS) 0 0 0 11 82 95 60 37
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 209 850 924 705 548
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 103 417 453 346 269
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 427 1,813 1,477 989 760
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 1,350 1,114 949 838 757 684
CONS IND & COMM TAX (MBBLS) 68 56 47 42 38 34
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 810 668 570 503 454 411
OPERATING EXPENSES (M$) 5,514 5,216 5,010 4,753 4,511 4,292
OPERATING EXPENSE VOLUME (MBBLS) 330 313 300 285 270 257
INVESTMENT RECOVERY OIL (MBBLS) 480 356 269 218 184 153
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 480 356 269 218 32 -
DEVELOPMENT COST CARRYOVER (MBBLS) 875 519 249 32 - -
DEEMED INTEREST (MBBLS) 141 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 480 356 269 218 32 -
REMAINDER OIL (MBBLS) 473 390 332 293 418 393
X FACTOR 0.950 0.950 0.950 0.950 0.950 0.950
CHINESE SHARE OIL (MBBLS) 24 19 17 15 21 20
ALLOCABLE REMAINDER OIL (MBBLS) 449 370 316 278 397 373
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 220 182 155 136 194 183
TOTAL CONTRACTOR OIL (MBBLS) 617 509 434 383 342 309
2010 2011 2012 2013 2014 2015
---- ----- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 621 549 492 448 323 -
CONS IND & COMM TAX (MBBLS) 31 27 25 22 16 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 373 329 295 269 194 -
OPERATING EXPENSES (M$) 1,599 1,401 3,737 3,634 3,275 -
OPERATING EXPENSE VOLUME (MBBLS) 96 84 224 218 196 -
INVESTMENT RECOVERY OIL (MBBLS) 277 245 71 51 (2) -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - (2) -
EXPLORATION COST CARRYOVER (MBBLS) - - - - 2 -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - (2) -
REMAINDER OIL (MBBLS) 494 437 243 208 113 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 25 22 12 10 6 -
ALLOCABLE REMAINDER OIL (MBBLS) 470 415 231 198 107 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 230 204 113 97 53 -
TOTAL CONTRACTOR OIL (MBBLS) 277 245 223 204 146 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 18,190
CONS IND & COMM TAX (MBBLS) 910
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 10,914
OPERATING EXPENSES (M$) 71,391
OPERATING EXPENSE VOLUME (MBBLS) 4,277
INVESTMENT RECOVERY OIL (MBBLS) 6,637
EXPLORATION COSTS (M$) 31,634
EXPLORATION RECOVERY (MBBLS) 1,895
EXPLORATION RECOVERY ADJUSTMENT (89)
EXPLORATION RECOVERY UTILIZED 1,804
EXPLORATION COST CARRYOVER (MBBLS) 5,476
DEVELOPMENT COSTS (M$) 64,804
DEVELOPMENT RECOVERY (MBBLS) 3,883
DEVELOPMENT RECOVERY UTILIZED 3,883
DEVELOPMENT COST CARRYOVER (MBBLS) 15,449
DEEMED INTEREST (MBBLS) 1,348
TOTAL COST RECOVERY OIL (MBBLS) 5,686
REMAINDER OIL (MBBLS) 7,317
X FACTOR -
CHINESE SHARE OIL (MBBLS) 475
ALLOCABLE REMAINDER OIL (MBBLS) 6,842
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 3,353
TOTAL CONTRACTOR OIL (MBBLS) 9,155
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 5,419 23,306 17,094 10,732 8,206
ALLOCABLE REVENUES 0 0 0 1,711 6,955 7,555 5,767 4,485
EXPLORATION EXPENSE (31,634) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (6,425) (16,729) (8,600) - - -
OPERATING EXPENSE - - - (847) (3,240) (3,695) (3,253) (2,904)
----- ----- ----- ---- ----- ------ ------ -----
NET CASH FLOW (31,634) 0 (6,425) (10,446) 18,420 20,955 13,247 9,786
====== ===== ====== ====== ====== ====== ====== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 6,627 5,466 4,659 4,110 2,469 2,103
ALLOCABLE REVENUES 3,672 3,029 2,582 2,277 3,244 3,053
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (2,702) (2,556) (2,455) (2,329) (2,210) (2,103)
----- ----- ----- ----- ----- -----
NET CASH FLOW 7,597 5,940 4,785 4,058 3,503 3,053
===== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 784 687 1,831 1,780 1,564 -
ALLOCABLE REVENUES 3,841 3,397 1,889 1,617 878 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (784) (687) (1,831) (1,780) (1,605) -
---- ---- ----- ----- ----- ----
NET CASH FLOW 3,841 3,397 1,889 1,617 837 -
===== ===== ===== ===== ==== ====
TOTALS
------
COST RECOVERY REVENUES 96,836
ALLOCABLE REVENUES 55,954
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (31,754)
OPERATING EXPENSE (34,981)
------
NET CASH FLOW 86,055
======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 3,565 15,130 12,325 8,250 6,345
EXPLORATION EXPENSE (15,817) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (3,212) (8,365) (4,300) - - -
OPERATING EXPENSE - - - (424) (1,620) (1,848) (1,626) (1,452)
---- ---- ----- ---- ----- ----- ----- -----
NET CASH FLOW (15,817) 0 (3,212) (5,223) 9,210 10,477 6,623 4,893
====== ==== ===== ===== ===== ====== ===== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 5,150 4,248 3,620 3,193 2,857 2,578
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (1,351) (1,278) (1,227) (1,164) (1,105) (1,052)
----- ----- ----- ----- ----- -----
NET CASH FLOW 3,799 2,970 2,393 2,029 1,752 1,527
===== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 2,312 2,042 1,860 1,699 1,221 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (392) (343) (916) (890) (802) -
---- ---- ---- ---- ---- ----
NET CASH FLOW 1,921 1,699 944 809 419 -
===== ===== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 76,395
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (15,877)
OPERATING EXPENSE (17,491)
------
NET CASH FLOW 43,028
======
INTERNAL RATE OF RETURN 75%
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 21,434
<PAGE>
<TABLE>
<CAPTION>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 28 MM BBL CASE
(D BLOCK: SEC CASE)
1996 1997 1998 1999 2000 2001 2002 2003
--- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 0 0 0 971 4,111 4,493 3,375 2,581
CONS IND & COMM TAX (MBBLS) 0 0 0 49 206 225 169 129
ROYALTY (MBBLS) - - - - - - - -
COST RECOVERY OIL (MBBLS) 0 0 0 583 2,467 2,696 2,025 1,548
OPERATING EXPENSES (M$) - - - 2,669 10,205 11,638 10,245 9,147
OPERATING EXPENSE VOLUME (MBBLS) - - - 160 611 697 614 548
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 423 1,855 1,999 1,411 1,000
EXPLORATION COSTS (M$) 48,818 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 2,925 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (138) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 423 1,855 509 - -
EXPLORATION COST CARRYOVER (MBBLS) 2,787 2,787 2,787 2,364 509 - - -
DEVELOPMENT COSTS (M$) - - 20,234 52,688 27,085 - - -
DEVELOPMENT RECOVERY (MBBLS) - - 1,212 3,157 1,623 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - 1,490 1,411 1,000
DEVELOPMENT COST CARRYOVER (MBBLS) - - 1,212 4,369 5,992 4,502 3,091 2,091
DEEMED INTEREST (MBBLS) - - - 109 403 576 457 319
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 423 1,855 1,999 1,411 1,000
REMAINDER OIL (MBBLS) 0 0 0 340 1,439 1,573 1,181 903
X FACTOR 0.950 0.950 0.950 0.950 0.881 0.876 0.895 0.913
CHINESE SHARE OIL (MBBLS) 0 0 0 17 171 195 124 78
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 323 1,268 1,378 1,057 825
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 158 621 675 518 404
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 659 2,776 2,256 1,510 1,163
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 2,084 1,719 1,465 1,292 1,169 1,056
CONS IND & COMM TAX (MBBLS) 104 86 73 65 58 53
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 1,250 1,032 879 775 701 634
OPERATING EXPENSES (M$) 8,509 8,050 7,732 7,334 6,961 6,624
OPERATING EXPENSE VOLUME (MBBLS) 510 482 463 439 417 397
INVESTMENT RECOVERY OIL (MBBLS) 741 549 416 336 284 237
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 741 549 416 336 49 -
DEVELOPMENT COST CARRYOVER (MBBLS) 1,350 801 385 49 - -
DEEMED INTEREST (MBBLS) 217 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 741 549 416 336 49 -
REMAINDER OIL (MBBLS) 729 602 513 452 644 606
X FACTOR 0.924 0.935 0.946 0.950 0.950 0.950
CHINESE SHARE OIL (MBBLS) 56 39 27 23 32 30
ALLOCABLE REMAINDER OIL (MBBLS) 674 563 485 430 612 576
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 330 276 238 211 300 282
TOTAL CONTRACTOR OIL (MBBLS) 943 781 669 591 528 477
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 959 847 759 692 498 -
CONS IND & COMM TAX (MBBLS) 48 42 38 35 25 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 575 508 455 415 299 -
OPERATING EXPENSES (M$) 3,826 3,520 5,767 5,608 5,054 -
OPERATING EXPENSE VOLUME (MBBLS) 229 211 346 336 303 -
INVESTMENT RECOVERY OIL (MBBLS) 346 297 110 79 (4) -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - (4) -
EXPLORATION COST CARRYOVER (MBBLS) - - - - 4 -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - (4) -
REMAINDER OIL (MBBLS) 682 593 375 321 174 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 34 30 19 16 9 -
ALLOCABLE REMAINDER OIL (MBBLS) 648 564 356 305 166 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 317 276 175 150 81 -
TOTAL CONTRACTOR OIL (MBBLS) 430 380 344 314 226 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 28,072
CONS IND & COMM TAX (MBBLS) 1,404
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 16,843
OPERATING EXPENSES (M$) 112,889
OPERATING EXPENSE VOLUME (MBBLS) 6,764
INVESTMENT RECOVERY OIL (MBBLS) 10,079
EXPLORATION COSTS (M$) 48,818
EXPLORATION RECOVERY (MBBLS) 2,925
EXPLORATION RECOVERY ADJUSTMENT (138)
EXPLORATION RECOVERY UTILIZED 2,783
EXPLORATION COST CARRYOVER (MBBLS) 8,451
DEVELOPMENT COSTS (M$) 100,007
DEVELOPMENT RECOVERY (MBBLS) 5,992
DEVELOPMENT RECOVERY UTILIZED 5,992
DEVELOPMENT COST CARRYOVER (MBBLS) 23,842
DEEMED INTEREST (MBBLS) 2,081
TOTAL COST RECOVERY OIL (MBBLS) 8,775
REMAINDER OIL (MBBLS) 11,129
X FACTOR -
CHINESE SHARE OIL (MBBLS) 900
ALLOCABLE REMAINDER OIL (MBBLS) 10,229
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 5,012
TOTAL CONTRACTOR OIL (MBBLS) 14,046
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 8,363 35,966 26,381 16,563 12,663
ALLOCABLE REVENUES 0 0 0 2,640 10,371 11,268 8,644 6,747
EXPLORATION EXPENSE (48,818) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (9,915) (25,817) (13,272) - - -
OPERATING EXPENSE - - - (1,308) (5,001) (5,702) (5,020) (4,482)
------ ----- ----- ----- ----- ------ ------ ------
NET CASH FLOW (48,818) 0 (9,915) (16,121) 28,065 31,946 20,186 14,928
===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 10,227 8,436 7,189 6,342 3,810 3,246
ALLOCABLE REVENUES 5,511 4,602 3,969 3,515 5,007 4,712
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (4,169) (3,944) (3,789) (3,594) (3,411) (3,246)
----- ----- ----- ----- ----- ----
NET CASH FLOW 11,568 9,094 7,370 6,263 5,406 4,712
====== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 1,875 1,725 2,826 2,748 2,413 -
ALLOCABLE REVENUES 5,296 4,611 2,914 2,496 1,355 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (1,875) (1,725) (2,826) (2,748) (2,476) -
----- ----- ----- ----- ----- ----
NET CASH FLOW 5,296 4,611 2,914 2,496 1,292 -
===== ===== ===== ===== ===== ====
TOTALS
------
COST RECOVERY REVENUES 150,772
ALLOCABLE REVENUES 83,657
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (49,004)
OPERATING EXPENSE (55,315)
------
NET CASH FLOW 130,110
=======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1996 1997 1998 1999
2000 2001 2002 2003
---- ---- ---- ----
- ---- ----- ---- ----
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 5,502
23,169 18,824 12,603 9,705
EXPLORATION EXPENSE (24,409) - - -
- - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (4,957) (12,909)
(6,636) - - -
OPERATING EXPENSE - - - (654)
(2,500) (2,851) (2,510) (2,241)
---- ---- ----- -----
- ----- ------ ------ -----
NET CASH FLOW (24,409) 0 (4,957) (8,061)
14,033 15,973 10,093 7,464
===== ==== ===== =====
====== ====== ====== =====
</TABLE>
2004 2005 2006 2007
2008 2009
---- ---- ---- ----
- ---- -----
TOTAL OIL REVENUES 7,869 6,519 5,579 4,928
4,409 3,979
EXPLORATION EXPENSE - - - -
- - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - -
- - -
OPERATING EXPENSE (2,085) (1,972) (1,894) (1,797)
(1,706) (1,623)
----- ----- ----- -----
- ----- ----
NET CASH FLOW 5,784 4,547 3,685 3,131
2,703 2,356
===== ===== ===== =====
===== =====
2010 2011 2012 2013
2014 2015
---- ---- ---- ----
- ---- -----
TOTAL OIL REVENUES 3,585 3,168 2,870 2,622
1,884 -
EXPLORATION EXPENSE - - - -
- - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - -
- - -
OPERATING EXPENSE (937) (863) (1,413) (1,374)
(1,238) -
----- ----- ----- -----
- ----- ----
NET CASH FLOW 2,648 2,305 1,457 1,248
646 -
===== ===== ===== =====
===== ====
TOTALS
------
TOTAL OIL REVENUES 117,215
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (24,502)
OPERATING EXPENSE (27,658)
------
NET CASH FLOW 65,055
======
INTERNAL RATE OF RETURN 74% NET
PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 32,444
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 46 MM BBL CASE
(ESTIMATE OF PAYMENT: PROVED ONLY - ESCALATED PRICING)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.32 17.32 18.32 19.14 19.99 20.88 21.80 22.76
GROSS OIL VOLUME (MBBLS) 0 0 0 1,600 6,775 7,405 5,563 4,253
CONS IND & COMM TAX (MBBLS) 0 0 0 80 339 370 278 213
ROYALTY (MBBLS) - - - - - 16 - -
COST RECOVERY OIL (MBBLS) 0 0 0 960 4,065 4,443 3,338 2,552
OPERATING EXPENSES (M$) - - - 3,914 16,818 19,179 16,884 15,075
OPERATING EXPENSE VOLUME (MBBLS) - - - 205 841 919 774 662
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 756 3,224 3,524 2,563 1,889
EXPLORATION COSTS (M$) 24,000 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 1,471 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (207) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 756 508 - - -
EXPLORATION COST CARRYOVER (MBBLS) 1,263 1,263 1,263 508 - - - -
DEVELOPMENT COSTS (M$) - - - - 164,811 - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - 8,244 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - 2,716 3,524 2,500 225
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - 5,527 2,003 - -
DEEMED INTEREST (MBBLS) - - - - - 497 225 20
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 756 3,224 3,524 2,500 225
REMAINDER OIL (MBBLS) 0 0 0 560 2,371 2,576 2,010 3,153
X FACTOR 0.950 0.950 0.950 0.940 0.845 0.837 0.865 0.879
CHINESE SHARE OIL (MBBLS) 0 0 0 34 367 420 271 381
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 526 2,004 2,156 1,739 2,772
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 258 982 1,056 852 1,358
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 1,114 3,233 3,233 2,457 1,793
2004 2005 2006 2007 2008 2009
----- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 23.76 24.80 25.88 27.00 28.17 29.38
GROSS OIL VOLUME (MBBLS) 3,435 2,833 2,415 2,130 1,926 1,741
CONS IND & COMM TAX (MBBLS) 172 142 121 106 96 87
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 2,061 1,700 1,449 1,278 1,156 1,044
OPERATING EXPENSES (M$) 14,023 13,266 12,742 12,087 11,472 10,916
OPERATING EXPENSE VOLUME (MBBLS) 590 535 492 448 407 372
INVESTMENT RECOVERY OIL (MBBLS) 1,471 1,165 956 830 748 673
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 20 2 - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) 2 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 20 2 - - - -
REMAINDER OIL (MBBLS) 2,652 2,155 1,801 1,576 1,423 1,282
X FACTOR 0.893 0.909 0.916 0.923 0.928 0.934
CHINESE SHARE OIL (MBBLS) 283 196 151 122 102 84
ALLOCABLE REMAINDER OIL (MBBLS) 2,370 1,959 1,651 1,454 1,320 1,198
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 1,161 960 809 712 647 587
TOTAL CONTRACTOR OIL (MBBLS) 1,460 1,223 1,050 932 847 769
2010 2011 2012 2013 2014 2015
----- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 30.64 31.95 33.32 34.74 36.22 37.75
GROSS OIL VOLUME (MBBLS) 1,580 1,395 1,250 1,140 821 -
CONS IND & COMM TAX (MBBLS) 79 70 63 57 41 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 948 837 750 684 493 -
OPERATING EXPENSES (M$) 7,925 7,422 9,504 9,241 8,329 -
OPERATING EXPENSE VOLUME (MBBLS) 259 232 285 266 230 -
INVESTMENT RECOVERY OIL (MBBLS) 689 605 465 418 263 -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) 1,242 1,093 902 817 550 -
X FACTOR 0.941 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 73 55 45 41 28 -
ALLOCABLE REMAINDER OIL (MBBLS) 1,169 1,039 857 776 523 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 573 509 420 380 256 -
TOTAL CONTRACTOR OIL (MBBLS) 700 623 560 511 369 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 46,263
CONS IND & COMM TAX (MBBLS) 2,313
ROYALTY (MBBLS) 16
COST RECOVERY OIL (MBBLS) 27,758
OPERATING EXPENSES (M$) 188,796
OPERATING EXPENSE VOLUME (MBBLS) 7,517
INVESTMENT RECOVERY OIL (MBBLS) 20,240
EXPLORATION COSTS (M$) -
EXPLORATION RECOVERY (MBBLS) -
EXPLORATION RECOVERY ADJUSTMENT (207)
EXPLORATION RECOVERY UTILIZED 1,263
EXPLORATION COST CARRYOVER (MBBLS) 3,035
DEVELOPMENT COSTS (M$) 164,811
DEVELOPMENT RECOVERY (MBBLS) 8,244
DEVELOPMENT RECOVERY UTILIZED 8,988
DEVELOPMENT COST CARRYOVER (MBBLS) 7,530
DEEMED INTEREST (MBBLS) 745
TOTAL COST RECOVERY OIL (MBBLS) 10,252
REMAINDER OIL (MBBLS) 26,164
X FACTOR -
CHINESE SHARE OIL (MBBLS) 2,652
ALLOCABLE REMAINDER OIL (MBBLS) 23,512
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 11,521
TOTAL CONTRACTOR OIL (MBBLS) 20,872
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 16,381 45,003 45,457 34,984 9,896
ALLOCABLE REVENUES 0 0 0 4,938 19,632 22,055 18,579 30,919
EXPLORATION EXPENSE (24,000) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - 0 - (80,757 - - -
OPERATING EXPENSE - - - (1,918) (8,241) (9,398) (8,273) (7,387)
------ ----- ----- ----- ------ ------ ----- -----
NET CASH FLOW (24,000) 0 0 (19,401) 24,363 58,114 45,289 33,429
====== ===== ====== ====== ====== ====== ====== ======
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 7,107 6,522 6,243 5,923 5,621 5,349
ALLOCABLE REVENUES 27,587 23,798 20,930 19,232 18,222 17,243
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (6,871) (6,500) (6,243) (5,923) (5,621) (5,349)
----- ------ ------ ------ ------ ------
NET CASH FLOW 27,823 23,820 20,930 19,232 18,222 17,243
====== ====== ====== ====== ====== ======
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 3,883 3,637 4,657 4,528 4,081 -
ALLOCABLE REVENUES 17,551 16,264 13,997 13,214 9,277 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (3,883) (3,637) (4,657) (4,528) (4,081) -
------ ------ ------ ----- ----- ----
NET CASH FLOW 17,551 16,264 13,997 13,214 9,277 -
====== ====== ====== ====== ===== ====
TOTALS
------
COST RECOVERY REVENUES 209,273
ALLOCABLE REVENUES 293,437
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (80,757)
OPERATING EXPENSE (92,510)
------
NET CASH FLOW 329,442
=======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (5.9% INTEREST)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 1,258 3,813 3,983 3,160 2,408
EXPLORATION EXPENSE (1,416) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - 0 - (4,765) - - -
OPERATING EXPENSE - - - (113) (486) (554) (488) (436)
----- ---- ----- ---- ----- ----- ----- -----
NET CASH FLOW (1,416) 0 0 1,145 (1,437) 3,429 2,672 1,972
===== ==== ===== ===== ===== ===== ===== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 2,047 1,789 1,603 1,484 1,407 1,333
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (405) (384) (368) (349) (332) (316)
----- ---- ----- ----- ----- -----
NET CASH FLOW 1,642 1,405 1,235 1,135 1,075 1,017
===== ==== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 1,265 1,174 1,101 1,047 788 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (229) (215) (275) (267) (241) -
----- ----- ----- ----- --- ----
NET CASH FLOW 1,036 960 826 780 547 -
===== ==== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 29,660
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (4,765)
OPERATING EXPENSE (5,458)
-----
NET CASH FLOW 19,437
======
NET PRESENT VALUES @ 12% AS OF 1-1-2000, (M$) 8,974 (AMOUNT OF
PAYMENT IN YEAR 2000)
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 7,416 (DISCOUNTED
PAYMENT)
[Coopers & Lybrand Logo] Coopers & Lybrand L.L.P.
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement
on Form S-1 of our reports, both of which include an explanatory
paragraph regarding the Company's ability to continue as a going
concern, dated April 10, 1998, on our audits of the consolidated
financial statements and financial statement schedule of XCL Ltd.
and financial statements of XCL-China Ltd. We also consent to
the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
May 6, 1998
H.J. GRUY AND ASSOCIATES, INC.
- ------------------------------------------------------------
1200 Smith Street, Suite 3040, Houston, Texas 77002 o FAX
(713) 739-6112 o (713)739-1000
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc.
and of references to H.J. Gruy and Associates, Inc. and to the inclusion
of and references to our report dated April 9, 1998 (Proved Reserves,
Zhao Dong Block, China) prepared for XCL Ltd. in the filing of the
Registration Statement on Form S-1 of XCL Ltd. for the year ended
December 31, 1997.
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
James H.Hartsock, PhD.,P.E.
Executive Vice President
May 6, 1998
Houston, Texas
