As filed with the Securities and Exchange Commission on October 23, 1998
Registration Statement No. 333-52229
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
__________
XCL LTD.
(Exact name of co-registrant as specified in its charter)
Delaware 1311 51-0305643
(State or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
XCL-CHINA LTD.
(Exact name of co-registrant as specified in its charter)
British Virgin Islands 1311 Not Applicable
(State or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508
(318) 237-0325
(Address, including zip code, and telephone number,
including area code, of co-registrants' 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
____________________________________
The co-registrants hereby amend this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the co-registrants shall file a further amendment
which specifically states that this Registration Statement shall
hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1998
PROSPECTUS
XCL LTD.
OFFER TO EXCHANGE
13.50% SENIOR SECURED NOTES DUE MAY 1, 2004, SERIES B
FOR ANY AND ALL OUTSTANDING 13.50% SENIOR SECURED NOTES
DUE MAY 1, 2004, SERIES A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON _____________________, 1998, UNLESS
EXTENDED
_________________________
XCL Ltd., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in
this Prospectus (as the same may be amended or supplemented from
time to time, this "Prospectus") and the accompanying letter of
transmittal (the "Letter of Transmittal," and together with this
Prospectus, the "Exchange Offer"), to exchange $1,000 principal
amount of its 13.50% Senior Secured Notes due May 1, 2004, Series B
(the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant
to the Exchange Offer Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for each $1,000 principal
amount of its outstanding 13.50% Senior Secured Notes due May 1,
2004, Series A (the "Old Notes"), of which $75,000,000 principal
amount is outstanding. The Exchange Notes are being offered for
exchange in order to satisfy certain obligations of the Company
under the Registration Rights Agreement dated as of May 20, 1997
(the "Registration Rights Agreement"), between the Company and
Jefferies & Company, Inc. (the "Initial Purchaser"). The form and
terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except for certain transfer
restrictions and registration rights relating to the Old Notes. The
Exchange Notes will evidence the same debt as the Old Notes and will
be issued under and be entitled to the benefits of the Indenture (as
defined herein). In the event that the Exchange Offer is
consummated, any Old Notes that remain outstanding after
consummation of the Exchange Offer and the Exchange Notes issued in
the Exchange Offer will vote together as a single class for purposes
of determining whether holders of the requisite percentage in
outstanding principal amount of the Notes have taken certain actions
or exercised certain rights under the Indenture. The Exchange Notes
and the Old Notes are collectively referred to herein as the
"Notes."
The Old Notes represent and the Exchange Notes will represent
senior obligations of the Company and the Old Notes rank and the
Exchange Notes will 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 Old Notes are and the
Exchange Notes will be secured by (i) a pledge of all the capital
stock of XCL-China Ltd., a company organized under the laws of the
British Virgin Islands and a wholly-owned subsidiary of the Company
("XCL-China"), and any other future Restricted Subsidiary (as
defined herein), and (ii) the full and unconditional guarantees (the
"Subsidiary Guarantees") of XCL-China and any other Subsidiary
Guarantor (as defined herein). The Subsidiary Guarantees are
general unsecured obligations of the Subsidiary Guarantors and rank
pari passu in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees are effectively subordinated to any secured
indebtedness of the Subsidiary Guarantors to the extent of the value
of the assets securing such indebtedness (see "Description of the
Notes"). As of June 30, 1998, the Company's outstanding
indebtedness (net of unamortized discount of $12,616,000) was
$64,458,000 representing the Exchange Notes and the Lutcher Moore
Debt (of $2,074,000), which is limited recourse debt.
The Company will accept for exchange any and all Old Notes that
are validly tendered on or prior to 5:00 p.m., New York City time,
on the date the Exchange Offer expires, which will be
_________________, 1998, unless the Exchange Offer is extended. See
"The Exchange Offer -- Expiration Date; Extensions; Amendments."
Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the business day prior to the
Expiration Date (as defined herein), unless previously accepted for
exchange. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain conditions which may be
waived by the Company (including that it does not violate any law,
that no action has been filed or threatened that would materially
impair the Company's ability to proceed and that all necessary
approvals have been obtained) and the Exchange Offer is subject to
the terms and provisions of the Registration Rights Agreement. Old
Notes may be tendered only in denominations of $1,000 principal
amount and integral multiples thereof. The Company has agreed to
pay the expenses of the Exchange Offer. See "The Exchange Offer."
See "Risk Factors" beginning on page [.] of this Prospectus for
a discussion of certain factors that should be considered in
evaluating an investment in the Notes.
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 OR ANY
STATE SECURITIES 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.
[The following legend appears in the left margin of the cover page
of the Prospectus.]
The co-registrants hereby amend this registration statement on such
date or dates as may be necessary to delay its effective date until
the co-registrants shall file a further amendment which specifically
states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, as amended, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The Exchange Notes will bear interest at the rate of 13.50%
per annum, payable semi-annually on May 1 and November 1 of each
year, commencing November 1, 1998. Holders of Exchange Notes of
record on April 15, 1999 will receive interest on May 1, 1999
from the date of issuance of the Exchange Notes, plus an amount
equal to the accrued and additional interest on the Old Notes
from November 1, 1998 to the date of exchange thereof. Interest
on the Old Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
The Old Notes were sold by the Company on May 20, 1997 to
the Initial Purchaser in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities
Act. The Old Notes were then offered and sold by the Initial
Purchaser only to "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) and to a limited number of
institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act), each of
whom agreed to comply with certain transfer restrictions and
other conditions. Accordingly, the Old Notes may not be offered,
resold or otherwise transferred unless registered under the
Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available.
The Company is making the Exchange Offer in reliance on the
position of the staff of the Division of Corporation Finance of
the Securities and Exchange Commission (the "Commission" or
"SEC") as set forth in certain interpretive letters addressed to
third parties in other transactions. However, the Company has
not sought its own interpretive letter and there can be no
assurance that the staff of the Division of Corporation Finance
of the SEC would make a similar determination with respect to the
Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the
Division of Corporation Finance, including no-action letters
issued by the staff of the Division of Corporation Finance to
Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1989), Morgan Stanley & Co. Inc., SEC No-
Action Letter (available June 5, 1991) (the "Morgan Stanley
Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by the respective
holders thereof (other than by a "Restricted Holder") without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such holder's
business and such holder is not participating in, and has no
arrangement with any person to participate in, a distribution
(within the meaning of the Securities Act) of such Exchange
Notes. Eligible holders wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met.
Holders who tender Old Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes
may not rely upon the Morgan Stanley Letter or similar no-action
letters. In addition, a Restricted Holder is (i) a broker-dealer
who purchased Old Notes exchanged for such Exchange Notes
directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of
Rule 405 under the Securities Act. Such person will be subject
to restrictions on resales or transfers of the Exchange Notes.
In the event that applicable interpretations by the staff of the
Division of Corporation Finance of the SEC change or otherwise do
not permit resales of the Exchange Notes without compliance with
the registration and prospectus delivery requirements of the
Securities Act, holders of Exchange Notes who transfer Exchange
Notes in violation of the prospectus delivery provisions of the
Securities Act or without an exemption from registration
thereunder may incur liability thereunder. See "The Exchange
Offer -- General." Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. A broker-dealer that delivers
such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions
under the Securities Act and will be bound by the provisions of
the Registration Rights Agreement (including certain
indemnification rights and obligations). This Prospectus, as it
may be amended or supplemented from time to time, may be used by
a broker-dealer in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed
that it will make this Prospectus and any amendment or supplement
to this Prospectus available to any broker-dealer for use in
connection with any such resale for a period of up to 180 days
after consummation of the Exchange Offer. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange
Offer.
The Exchange Notes will constitute a new issue of securities
with no established trading market, and there can be no assurance
as to the liquidity of any markets that may develop for the
Exchange Notes or as to the ability of or price at which the
holders of Exchange Notes would be able to sell their Exchange
Notes. Future trading prices of the Exchange Notes will depend
on many factors, including, among others, prevailing interest
rates, the Company's operating results and the market for similar
securities. The Company does not intend to apply for listing of
the Exchange Notes on any securities exchange. The Initial
Purchaser has informed the Company that it currently intends to
make a market for the Exchange Notes. However, it is not so
obligated, and any such market making may be discontinued at any
time without notice. Accordingly, no assurance can be given that
an active public or other market will develop for the Exchange
Notes or as to the liquidity of or the trading market for the
Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE
COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES
IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE
THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE
SKY LAWS OF SUCH JURISDICTION.
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 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 with the
Commission. These can be accessed over the Internet at
http://www.sec.gov. The Company's Common Stock is listed on the
American Stock Exchange (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. While any Old Notes remain
outstanding, the Company will make available, upon request, to
any holder and any prospective purchaser of Old Notes, the
information required pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act. Any such
request should be directed to the Secretary of the Company, 110
Rue Jean Lafitte, 2nd Floor, Lafayette, Louisiana 70508.
This Prospectus constitutes part of a registration statement
on Form S-4 (together with all amendments and exhibits referred
to in this Prospectus as the "Exchange Offer Registration
Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus omits some of the information
set forth in the Exchange Offer Registration Statement. Consult
the Exchange Offer 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 Exchange Offer 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 THE ACCOMPANYING LETTER OF
TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF
THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, 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. NEITHER
THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, 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,
the timing of development costs and future net revenues. 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, 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 "Zhao Dong
Block") located in the shallow waters of the Bohai Bay in the
People's Republic of China ("China"). The Company obtained a
second prodution sharing contract covering the Zhang Dong Block
(the "Zhang Dong Block") also in the shallow waters of the Bohai
Bay, effective October 1, 1998. To date the Company has not
generated any profits from these operations. The Company's only
historic revenues were derived from its financing activities and
properties currently held for sale or investment or previously
sold. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company is in the
development stage with respect to its operations in China and has
not generated any revenues from operations related to its
properties and interests in China.
The Zhao Dong Block is located in one of China's major oil-
producing basins. Geologic information suggests that a portion of
the Zhao Dong Block is an extension of the onshore Dagang oil
field complex to the west. Approximately 700 million barrels
have already been produced from that field and it is still under
production. The Zhao Dong Block is also about 40 miles northwest
of the Shengli oil field, the largest in the basin, from which
about 4 billion barrels have already been produced. The Shengli
oil field is still under production as well. Of course,
production in those fields does not ensure that there will be
production from the Zhao Dong Block.
In early 1993, XCL became the first foreign company to enter
into an onshore Production Sharing Agreement (the "Contract"),
with China National Oil and Gas Exploration and Development
Corporation ("CNODC") (which is a Chinese state enterprise). The
Contract provides for exploration, development, and production of
the Zhao Dong Block. CNODC is the arm of the China National
Petroleum Company ("CNPC"), also a state enterprise, in charge of
all onshore exploration and production activity in China out to
five meters in water depth. CNODC operates in this area through
its subsidiary, Dagang Oilfield (Group) Co. Ltd. ("Dagang").
The Contract provides that the "Foreign Contractor" (the
Company and Apache Corporation ("Apache") 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 up
to 51% of all development and operating costs and allocable
remainder oil and gas production allocated to CNODC and the
remaining interest 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 ten wells
drilled to date on the Zhao Dong Block, with total test rates
exceeding 39,500 barrels of oil per day. Of the four 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.
Based on the report of H.J. Gruy and Associates ("Gruy"),
the Company's independent petroleum engineers, net proved
reserves in the C-D Field are estimated to be 11.76 million
barrels as of January 1, 1998 and the estimated present value of
future pre-tax net cash flows is approximately $64.8 million.
The standardized measure of discounted future net cash flows
determined in accordance with the rules prescribed by FASB No. 69
is $53.8 million. Future reserve values are based on year end
prices and operating costs, production and future development
costs based on current costs with no escalation. See "Business -
- - Oil and Gas Reserves" and "Supplemental Oil and Gas
Information" in the Notes to the Consolidated Financial
Statements.
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 Plan ("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 Zhao Dong Block, and has been approved
by 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, and
have, as a result, suggested some revisions to the original ODP.
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 Zhao Dong Block
begin as soon as practicable and the parties are assessing how
that would be commercially feasible. Initial results indicate
that 1999 production is possible and the Company, Apache and
CNODC have decided to attempt to commence initial production in
1999.
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 Apache (the
"Operator") (which XCL understands 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 by the Operator in
the original ODP for several reasons. Cost reductions are
expected in part based on design changes to the ODP 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. In addition, the initial ODP included estimates
of contingencies larger than the industry standard. Finally,
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 of oil 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 Zhao Dong Block. In
August 1998, CNODC, XCL, and Apache commenced drilling a well to
appraise the C-4 Well. If this drilling proves successful, early
production from the two initial wells in the C-4 Well area may
begin by mid-1999; 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 "Organizational
Chart" below and "Business--United/XCL Lube Oil Joint Venture"
and "-- Coalbed Methane Project." Further, in August 1998 the
Company, through its wholly owned subsidiary XCL-Cathay Ltd.,
signed a production sharing contract with CNODC for the 12,000-
acre Zhang Dong Block which was approved in September 1998,
effective October 1, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation --
Liquidity, Capital Resources and Management's Plans."
The Private Placement and Use of Proceeds Thereof
-------------------------------------------------
The Old Notes were sold by the Company on May 20, 1997 to
the Initial Purchaser and were thereupon offered and sold by the
Initial Purchaser only to certain qualified buyers. The $60.4
million of net proceeds received by the Company in connection
with the sale of the Old Notes was and will be used to repay
indebtedness, for development expenditures and contractual
exploration obligations and for working capital purposes. See
"Private Placement" and "Capitalization."
The Exchange Offer
------------------
The Exchange Offer relates to the exchange of up to
$75,000,000 principal amount of Exchange Notes for up to
$75,000,000 principal amount of Old Notes. The form and terms of
the Exchange Notes are identical in all material respects to the
form and terms of the Old Notes, except that the Exchange Notes
have been registered under the Securities Act and will not
contain certain transfer restrictions and hence are not entitled
to the benefits of the Registration Rights Agreement relating to
the contingent increases in the interest rate provided for
pursuant thereto. The Exchange Notes will evidence the same debt
as the Old Notes and will be issued under and be entitled to the
benefits of the Indenture governing the Old Notes. See
"Description of the Notes."
The Exchange Offer.............. Each $1,000 principal amount of
Exchange Notes will be issued
in exchange for each $1,000
principal amount of outstanding
Old Notes. As of the date
hereof, $75,000,000 principal
amount of Old Notes are issued
and outstanding. The Company
will issue the Exchange Notes
to tendering holders of Old
Notes on or promptly after the
Expiration Date.
Resale................. The Company believes that the Exchange Notes
issued pursuant to the Exchange
Offer generally will be freely
transferable by the holders
thereof without registration or
any prospectus delivery
requirement under the
Securities Act, except for
certain Restricted Holders who
may be required to deliver
copies of this Prospectus in
connection with any resale of
the Exchange Notes issued in
exchange for such Old Notes.
See "The Exchange Offer --
General" and "Plan of
Distribution."
Expiration Date................. 5:00 p.m., New York City time, on
[____________, 1998], unless
the Exchange Offer is extended,
in which case the term
"Expiration Date" means the
latest date to which the
Exchange Offer is extended.
See "The Exchange Offer --
Expiration Date; Extensions;
Amendments."
Interest on the Notes........... The Exchange Notes will bear
interest payable semi-annually
on May 1 and November 1 of each
year, commencing May 1, 1999
(assuming the Exchange Notes
are not issued prior to
November 1, 1998). Holders of
Exchange Notes of record on
April 15, 1999 will receive
interest on May 1, 1999 from
the date of issuance of the
Exchange Notes, plus an amount
equal to the accrued interest
on the Old Notes from November
1, 1998 to the date of exchange
thereof, plus additional
interest attributable to the
late filing and effectiveness
of the Exchange Offer
Registration Statement.
Consequently, assuming this
registration statement is
declared effective on November
15, 1998 and the Exchange Offer
is consummated prior to the
record date in respect of the
May 1, 1999 interest payment
for the Old Notes, holders who
exchange their Old Notes for
Exchange Notes will receive the
same interest payment on May 1,
1999 that they would have
received had they not accepted
the Exchange Offer, together
with additional interest of
$4.40 for each $1,000 in
outstanding principal amount.
Interest on the Old Notes
accepted for exchange will
cease to accrue upon issuance
of the Exchange Notes. See
"The Exchange Offer -- Interest
on the Exchange Notes" and
"Description of the Notes --
Registration Rights."
Procedures for Tendering Old Notes.... Each holder of the
Old Notes wishing to accept the
Exchange Offer must complete,
sign and date the Letter of
Transmittal, or a facsimile
thereof, in accordance with the
instructions contained herein
and therein, and mail or
otherwise deliver such Letter
of Transmittal, or such
facsimile, or an Agent's
Message (as defined herein)
together with the Old Notes to
be exchanged and any other
required documentation to the
Exchange Agent at the address
set forth herein and therein or
effect a tender of Old Notes
pursuant to the procedures for
book-entry transfer as provided
for herein. See "The Exchange
Offer -- Procedures for
Tendering."
Special Procedures for Beneficial
Holders....................Any beneficial holder whose Old Notes are
registered in the name of a
broker, dealer, commercial
bank, trust company or other
nominee and who wishes to
tender in the Exchange Offer
should contact such registered
holder promptly and instruct
such registered holder to
tender on the beneficial
holder's behalf. If such
beneficial holder wishes to
tender directly, such
beneficial holder must, prior
to completing and executing the
Letter of Transmittal and
delivering the Old Notes,
either make appropriate
arrangements to register
ownership of the Old Notes in
such holder's name or obtain a
properly completed bond power
from the registered holder.
The transfer of record
ownership may take considerable
time. See "The Exchange Offer -
- Procedures for Tendering."
Guaranteed Delivery Procedures........ Holders of Old Notes who
wish to tender their Old Notes
and whose Old Notes are not
immediately available or who
cannot deliver their Old Notes
and a properly completed Letter
of Transmittal or any other
documents required by the
Letter of Transmittal to the
Exchange Agent prior to the
Expiration Date, or who cannot
complete the procedure for book-
entry transfer on a timely
basis and deliver an Agent's
Message, may tender their Old
Notes according to the
guaranteed delivery procedures
set forth in "The Exchange
Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights............... Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m.,
New York City time, on the
business day prior to the
Expiration Date, unless
previously accepted for
exchange. See "The Exchange
Offer -- Withdrawal of
Tenders."
Termination of the Exchange Offer............. The Company may
terminate the Exchange Offer if
it determines that the Exchange
Offer violates any applicable
law or interpretation of the
staff of the SEC. Holders of
Old Notes will have certain
rights against the Company
under the Registration Rights
Agreement should the Company
fail to consummate the Exchange
Offer. See "The Exchange Offer
-- Termination" and
"Description of the Notes --
Registration Rights."
Acceptance of Old Notes and
Delivery of Exchange Notes.......... Subject to certain conditions
(as summarized above in
"Termination of the Exchange
Offer" and described more fully
in "The Exchange Offer --
Termination"), the Company will
accept for exchange any and all
Old Notes which are properly
tendered in the Exchange Offer
prior to 5:00 p.m., New York
City time, on the Expiration
Date. The Exchange Notes
issued pursuant to the Exchange
Offer will be delivered
promptly following the
Expiration Date. See "The
Exchange Offer -- General."
Exchange Agent..........State Street Bank and Trust Company is
serving as exchange agent (the
"Exchange Agent") in connection
with the Exchange Offer. The
mailing address of the Exchange
Agent is: State Street Bank
and Trust Company, Corporate
Trust Department, P.O. Box 778,
Boston, MA 02102-0078. Hand
deliveries and deliveries by
overnight courier should be
addressed to: State Street
Bank and Trust Company,
Corporate Trust Department,
Fourth Floor, Two International
Place, Boston, MA 02110. For
information with respect to the
Exchange Offer, the telephone
number for the Exchange Agent
is (800) 531-0368 and the
facsimile number for the
Exchange Agent is (617) 664-
5739. (Confirm fax by
telephone: (617) 664-5456.)
See "The Exchange Offer--
Exchange Agent."
Use of Proceeds..........There will be no cash proceeds payable
to the Company from the
issuance of the Exchange Notes
pursuant to the Exchange Offer.
See "Use of Proceeds." For a
discussion of the use of the
net proceeds received by the
Company from the sale of the
Old Notes, see "Private
Placement."
Terms of the Notes
------------------
Notes Outstanding............. $75,000,000 principal amount of 13.50%
Senior Secured Notes due May 1,
2004.
Maturity Date.................. May 1, 2004.
Interest on the Notes...........Interest on the Notes will accrue
from May 20, 1997 and will be
payable semi-annually on May 1
and November 1, commencing
November 1, 1997, at a rate of
13.50% per annum. See
discussion of additional
interest due on the Notes in
"Registration Rights" below.
Optional Redemption............Except as described under "Change of
Control" below, the Notes are
not redeemable prior to May 1,
2002, except that the Company
may redeem, at its option, up
to 35% of the original
aggregate principal amount of
the Notes at the redemption
price set forth herein, plus
accrued and unpaid interest, if
any, to the date of redemption,
with the net proceeds of any
Equity Offering (as defined
below) completed within 90 days
prior to such redemption. On
or after May 1, 2002, the Notes
are redeemable at the option of
the Company, in whole or in
part, at the redemption prices
set forth herein, plus accrued
and unpaid interest, if any, to
the date of redemption. See
"Description of the Notes --
Redemption."
Mandatory Redemption............ None, except as set forth below
under "Change of Control."
Change of Control............ Upon a Change of Control, each Holder
will have the right to require
the Company to purchase such
Holder's Notes at a price equal
to 101% of the principal amount
thereof, plus accrued and
unpaid interest, if any,
thereon, to the date of
purchase. In addition, the
Company will be obligated to
offer to purchase the Notes at
100% of the principal amount
thereof plus accrued and unpaid
interest, if any, to the date
of purchase, in the event of
certain asset sales.
Security.............. The Old Notes are and the Exchange Notes will
be secured by a pledge by the
Company of all of the
outstanding capital stock of
XCL-China Ltd., a wholly-owned
British Virgin Islands
subsidiary through which the
Company conducts its operations
in the Zhao Dong Block ("XCL-
China") and all outstanding
capital stock of any future
Restricted Subsidiary. See
"Description of the Notes --
Security." The Old Notes have
been, and the Exchange Notes
will be, issued pursuant to an
indenture (the "Indenture")
prohibiting the Company and its
Restricted Subsidiaries from
incurring or permitting any
liens on their assets and
properties other than Permitted
Liens (as defined below). See
"Description of the Notes --
Certain Covenants -- Limitation
on Liens."
Guarantees...............The Company's payment obligations under the
Notes are jointly and severally
guaranteed (the "Subsidiary
Guarantees") on an
unconditional senior basis
initially only by XCL-China and
under certain circumstances by
other Restricted Subsidiaries
(the "Subsidiary Guarantors").
See "Description of Notes --
Subsidiary Guarantees."
Certain Covenants............... The Indenture contains certain
covenants that, among other
things, limit the ability of
the Company or any of its
Restricted Subsidiaries to
incur additional indebtedness,
transfer or sell assets,
transfer assets to subsidiaries
or create new subsidiaries, pay
dividends or make certain other
restricted payments, enter into
certain transactions with
affiliates, or consummate a
merger, consolidation or sale
of all or substantially all of
its assets. These covenants
are subject to certain
exceptions and qualifications.
See "Description of the Notes -
- Certain Covenants."
Registration Rights.............Pursuant to a registration rights
agreement (the "Registration
Rights Agreement") between the
Company and the Initial
Purchaser, the Company agreed,
and agreed to cause any
Subsidiary Guarantors, (i) to
file a registration statement
(the "Exchange Offer
Registration Statement") with
respect to an offer to exchange
the Old Notes and any existing
Subsidiary Guarantees (the
"Exchange Offer") for senior
secured notes of the Company,
with substantially identical
terms to the Old Notes and
guarantees (the "Exchange
Notes") (except that the
Exchange Notes will not contain
terms with respect to transfer
restrictions) within 60 days
after the Trigger Date (as
defined under "Description of
the Notes -- Registration
Rights"), (ii) to use their
best efforts to cause such
registration statement to
become effective under the
Securities Act within 150 days
after the Trigger Date and
(iii) upon the Exchange Offer
Registration Statement being
declared effective, to offer
the Exchange Notes in exchange
for surrender of the Old Notes
and any existing Subsidiary
Guarantees. The Registration
Statement of which the
Prospectus is a part
constitutes such Exchange Offer
Registration Statement. In the
event that applicable law or
interpretations of the staff of
the Division of Corporation
Finance of the Commission do
not permit the Company and any
Subsidiary Guarantors to effect
the Exchange Offer, or if for
any other reason the Exchange
Offer is not consummated, or if
certain holders of the Notes
are not permitted to
participate in, or do not
receive the benefit of, the
Exchange Offer, the Company
will use its best efforts to
cause a shelf registration
statement with respect to the
resale of the Old Notes to
become effective and to keep
such shelf registration
statement effective until the
earlier of two years after the
Issue Date (or such earlier
date as may be authorized under
Rule 144(k), as it may be
amended from time to time) or
such time when all the Notes
have been sold thereunder or
are all otherwise eligible for
sale under Rule 144 under the
Securities Act by the holders
without reduction by virtue of
the operation of the volume
limitations set forth in such
Rule. The interest rate on the
Old Notes is subject to
increase under certain
circumstances if the Company
and any Subsidiary Guarantors
are not in compliance with
their obligations under the
Registration Rights Agreement.
As a result of the Registration
Default in the filing of the
Exchange Offer Registration
Statement with the Commission,
the interest rate on the Old
Notes increased by .5%, to 14%,
on December 15, 1997 and by
another .5%, to 14.5%, on March
15, 1998 through May 8, 1998
when the Registration Statement
was filed, thereby curing the
Registration Default and
reducing the interest rate back
to 13.5%. This resulted in
additional interest due on May
1, 1998 of $3.34 per $1,000 of
outstanding principal amount of
the Old Notes. As a result of
the Registration Default in the
failure of the Exchange Offer
Registration Statement to
become effective timely, the
interest rate on the Old Notes
increased by .5%, to 14%, on
May 14, 1998 and by another
.5%, to 14.5% on August 13,
1998, resulting in additional
interest due on November 1,
1998 (assuming the Exchange
Offer Registration Statement
has not been declared effective
by then) of $4.40 per $1,000 of
outstanding principal amount of
the Old Notes. On November 10,
1998 (assuming the Exchange
Offer Registration Statement
has not yet been declared
effective by then), the
interest rate will increase by
another .5%, to 15%. See
"Description of the Notes --
Registration Rights."
Transfer Restrictions........... The Old Notes were not registered
under the Securities Act and
may not be offered or sold
within the United States to or
for the benefit of United
States persons, except pursuant
to an exemption from, or in a
transaction not subject to, the
registration requirements of
the Securities Act. See
"Transfer Restrictions on Old
Notes."
For additional information regarding the Notes, see
"Description of the Notes."
Risk Factors
------------
See "Risk Factors" for a discussion of certain factors that
should be considered in evaluating an investment in the Notes.
Summary Historical Financial Information
----------------------------------------
The following tables represent summary historical
consolidated financial data of the Company. The balance sheet data
as of the five years ended December 31, 1997, has been derived from
the audited consolidated financial statements of the Company. The
balance sheet data as of the six month periods ended June 30, 1998
and 1997 has been derived from the unaudited financial statements of
the Company. The information in these tables 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>
Six Months
Year Ended December 31 Ended June 30
---------------------------------------------------------------- --------------------
1993(a) 1994(b) 1995(c) 1996(e) 1997(g)(j) 1997(j) 1998(j)
------- ------- ------- ------- ---------- ------- -------
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 8,499 $ 4,336 $ 2,480 $ 1,136 $ -- $ -- $ --
Operating expenses 2,449 1,341 985 342 -- -- $ --
General and administrative expenses 3,840 4,553 4,551 3,487 5,167 1,562 2,915
Depreciation, depletion and
amortization 5,788 3,292 2,266 579 -- -- --
Other, net -- -- -- -- 2,891 28 72
Operating loss (12,518) (33,875) (85,673) (9,793) (8,058) (1,590) (2,987)
Net interest expense 1,329 1,831 2,998 2,415 8,450 1,646 1,852
Interest income 141 508 133 8 2,212 498 718
Net loss (15,197) (36,622) (87,837) (12,074) (13,994) (2,426) (4,120)
Net loss attributable to common stock (19,978) (41,529) (92,658) (17,430) (27,722) (5,742) (8,999)
Net loss per common share
Basic (2.52) (3.14) (5.77) (0.98) (1.36) (.29) (.40)
Diluted (2.52) (3.14) (5.77) (0.98) (1.36) (.29) (.40)
Weighted average common
shares outstanding - basic 7,933 13,220 16,047 17,705 20,451 19,511 22,622
Weighted average common
shares outstanding - diluted 7,933 13,220 16,047 17,705 20,451 19,511 22,622
Deficiency of earnings to combined
fixed charges and preferred
stock dividends (i) (i) (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 $ (34,468) $ 5,972
Total assets 157,377 149,803 72,336 60,864 119,089 151,890 117,204
Long-term debt, net of current
maturities 53,965 (d) 41,607(d) 15,644 -- (f) 61,310(h) -- (f) 62,384(h)
Stockholders' equity 84,609 95,200 16,900 11,041 40,825 34,824 37,799
____________
(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. (See
"Business - Domestic Properties -- Lutcher Moore Tract").
(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 of $38.02 million at December
31, 1996 and $104.3 million at June 30, 1997 was classified
as currently due.
(g) Includes extraordinary loss for early extinguishment of
debt of $551,000.
(h) Long term debt is net of unamortized discount of $13.7
million and $12.6 million as of December 31, 1997 and June
30, 1998, respectively, associated with the value allocated
to the stock purchase warrants issued with the Company's
Notes.
(i) The earnings were inadequate to cover fixed charges.
The dollar amount of the coverage deficiency was $16.5
million in 1993; $38.5 million in 1994; $90.8 million in
1995; $14.5 million in 1996; and $22.4 million for in 1997;
$4.1 million for the six months ended June 30, 1997; and
$6.0 million for the six months ended June 30, 1998.
(j) Revenues and operating expenses associated with oil and
gas properties held for sale have become insignificant and,
accordingly, are recorded in other costs and operating
expenses in the accompanying consolidated statements of
operations.
</TABLE>
Organizational Chart
--------------------
[Organizational Chart]
XCL Ltd. (1) (Parent Company)
XCL-China Ltd. (Wholly owned subsidiary)
XCL-China LubeOil, Ltd. (3) (Wholly owned subisiary)
XCL-China Coal Methane, Ltd. (4) (Wholly owned subsidiary)
XCL-Cathay Ltd. (5) (Wholly owned subsidiary)
XCL-Texas, Inc. (Wholly owned subsidiary)
XCL-Acquisitions, Inc. (Wholly owned subsidiary)
The Exploration Company of Louisiana, Inc. (2) (Wholly owned subsidiary)
XCL-Land Ltd. (2) (Wholly owned subsidiary)
L.M. Holding Associates, L.P., a Louisiana Partnership in Commendam (2)
_________________
(1) XCL holds one-half of the Foreign Contractor's interest under a
Production Sharing Contract covering the Zhao Dong Block; Apache Corporation
holds the other one-half of the Foreign Contractor's interest; CNPC holds an
interest of up to 51% of any fields developed under the Production Sharing
Contract.
(2) The Exploration Company of Louisiana, Inc. holds a 50% interest and is a
limited partner and XCL-Land Ltd. holds a 50% interest and is a general partner
in L.M. Holding Associates, L.P., a Louisiana Partnership in Commendam.
(3) XCL-China LubeOil, Ltd. holds a 49% interest in a joint venture with
CNPC United LubeOil Corporation for the production and sale of lubricants.
(4) XCL-China Coal Methane, Ltd. holds a Memorandum of Understanding with
the China National Administration of Coal Geology (CNACG) regarding the
exploration, evaluation, development and utilization of the coalbed methane
resource in the Hancheng and Tiafa mining areas.
(5) XCL-Cathay Ltd. holds a Production Sharing Contract covering the Zhang
Dong Block; CNPC holds an interest up to 51% of any fields developed under such
contract.
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 [5] 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 (the "Indenture") governing the Company's Notes 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. See
"Description of the Notes -- Certain Covenants." The Company's
interest in the Zhang Dong Block, which is held by XCL-Cathay
Ltd., may not be subject to all of the foregoing restrictions.
The Company's earnings to fixed charges ratio and preferred
stock is insufficient to cover dividend payments and payments on
Notes. 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.
Adequacy of Collateral; Risks of Foreclosure
- --------------------------------------------
The Company has pledged to the Trustee, for the ratable
benefit of the holders of the Notes, all of the outstanding
capital stock of XCL-China, through which the Company owns and
conducts its operations on the Zhao Dong Block. The Company and
XCL-China have executed and delivered a supplement to the
Indenture pursuant to which the Notes will be unconditionally
guaranteed, jointly and severally, by XCL-China and any other of
the Company's Restricted Subsidiaries. See "Description of the
Notes -- Security" and "-- Subsidiary Guarantees."
In the event of foreclosure on the XCL-China capital stock,
there can be no assurance that the Trustee would be able to sell
any of the pledged shares without substantial delays and other
risks or that the proceeds obtained will be sufficient to pay all
amounts owing to holders of the Notes. Furthermore, there is
some risk that the Chinese government might take the position
that its permission is required for sales of the pledged shares.
In addition, Apache has a right of first refusal on the direct or
indirect sale of the Company's interest in the Zhao Dong Block,
as well as an option to purchase the Company's interest in the
Zhao Dong Block (subject to necessary Chinese approval) for the
fair market value of that interest. Apache's right to exercise
this option is triggered by certain defaults by the Company, the
insolvency or liquidation of the Company or XCL-China, or the
transfer of more than a 49% interest in XCL-China. The existence
of, or Apache's exercise of rights under, its right of first
refusal or its option could have an adverse impact on the
Noteholders' ability to realize value from their security. See
"Business -- Apache Farmout."
Ranking of Indebtedness and Subsidiary Guarantees
- -------------------------------------------------
The Notes (i) represent senior obligations of the Company
and rank pari passu in right of payment to all indebtedness of
the Company (other than any indebtedness that is expressly
subordinated to the Notes) and (ii) are secured by a pledge of
all of the outstanding capital stock of XCL-China and any future
Subsidiary Guarantors. However, the Notes are effectively
subordinated to any future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness.
See "Description of the Notes." The Indenture with respect to the
Notes contains a covenant limiting the ability of the Company and
its Restricted Subsidiaries to incur any liens upon their assets
other than certain permitted liens. See "Description of the
Notes -- Certain Covenants -- Limitation on Liens."
When issued, the Subsidiary Guarantees will be general
unsecured obligations of the Subsidiary Guarantors and will rank
pari passu in right of payment to all unsubordinated indebtedness
of the Subsidiary Guarantors and senior in right of payment to
all subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees will be effectively subordinated to secured
indebtedness of the Subsidiary Guarantors to the extent of the
value of the assets securing such indebtedness. See "Description
of Notes -- Subsidiary Guarantees." As of June 30, 1998, XCL-
China, the initial Subsidiary Guarantor, had no outstanding
indebtedness other than amounts due under the operating agreement
with Apache (which, except for certain amounts in dispute, which
are currently subject to arbitration, were paid with the proceeds
of the Prior Equity Offering, as defined below) and $66 million
due to the Company on account of parent company advances. See
"Business -- - Apache Farmout."
Repurchase of Notes Upon a Change of Control; Certain Anti-
takeover Charter Provisions
- --------------------------------------------------------------------------------
Upon the occurrence of a Change of Control, the Company must
offer to purchase all of the Notes then outstanding at a price
equal to 101% of the principal amount thereof, plus accrued
interest to the date of purchase (a "Change of Control Offer").
See "Description of the Notes -- Change of Control."
Prior to commencing such an offer to purchase, the Company
may be required to (i) repay in full all indebtedness of the
Company that would prohibit the purchase of the Notes, or (ii)
obtain any requisite consent to permit the repurchase. If the
Company were unable to repay all of such indebtedness or were
unable to obtain the necessary consents, then the Company would
be unable to offer to purchase the Notes and such failure would
constitute an Event of Default under the Indenture. There can be
no assurance that the Company will have sufficient funds
available at the time of any Change of Control to purchase the
Notes.
The events that require a Change of Control Offer under the
Indenture may also constitute events of default under a credit
facility that the Company may enter into in the future. Such
events may permit the lenders under such credit facility to
accelerate the payment of the debt and, if the debt is not paid,
to commence litigation which could ultimately result in a sale of
substantially all of the assets of the Company to satisfy the
debt, thereby limiting the Company's ability to raise cash to
repurchase the Notes and reducing the practical benefit of the
offer to purchase provisions to the holders of the Notes.
The Company's Amended and Restated Certificate of
Incorporation contains certain provisions which the Board of
Directors believes may impede a third party from effecting a
sudden or surprise change of majority control of the Company's
Board of Directors or successfully completing a takeover of the
Company without the support of the incumbent Board of Directors.
See "Description of Capital Stock -- Common Stock -- Special
Charter and By-Law Provisions." The Change of Control Offer
provisions of the Indenture likewise may make a takeover of the
Company more difficult.
Oil and Gas Properties; Capital Expenditures
- --------------------------------------------
The Company's total reserves, as of December 31, 1997 and
June 30, 1998, were all classified as proved and undeveloped, 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
Zhao Dong Block and for activity on the Zhang Dong Block.
The Company plans to generate the additional cash needed
through the sale or financing of its domestic assets held for
sale, a financing involving the Lutcher Moore Tract, the Zhao
Dong Block or the Zhang Dong Block or 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 such assets 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. The
Indenture limits the Company's ability to obtain additional debt
financing, and there can be no assurance that additional debt or
equity financing, or additional cash from operations, will be
available. If funds are raised on an equity basis, there may be a
dilutive effect to current shareholders.
If production from the oil and gas properties commences by
mid-1999, as currently 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" and "Description of Notes -- Certain
Covenants." 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" and "-- Domestic
Properties -- Lutcher Moore Tract."
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 and future net
revenue from proved reserves described in this Prospectus are
based on the assumption that the Zhao Dong 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 Zhao Dong 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 fluid 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 currency
denominated assets. It is impossible to predict the ultimate
outcome of these events and their possible negative effect on the
Company's investments in China.
First Onshore Production Sharing Agreement Between CNODC and a
Foreign Company
- ---------------------------------------------------------------
In early 1993 the Company became the first foreign company
to enter into an onshore production agreement with CNODC
(although since that time a number of other foreign companies
have also done so). Because XCL was the first foreign company
to enter into such a contract, there was some uncertainty as to
how it would be administered.
Currency/Exchange Rate Fluctuations
- -----------------------------------
For the foreseeable future the Company's only material
revenues will be from its oil and gas activities. These
revenues will be in U.S. dollars. To the extent that at some
future time revenues are paid to the Company in Chinese Renminbi
rather than in dollars, the Company's earnings, operations and
cash flows would then be subject to currency and exchange rate
fluctuations and to restrictions imposed by the Chinese
government on the transfer and exchange of funds. If that
occurs the Company will evaluate the currency requirements of
each venture and, if possible, enter into forward exchange
contracts to hedge foreign currency transactions. There can be
no assurance, however, that such forward exchange contracts will
be available at the time of any such occurrence. The Company
does not intend to engage in currency speculation. Renminbi
earnings, if any, must be converted to pay dividends or to make
other payments to the Company in U.S. dollars or other freely
convertible currencies. As of December 1, 1996, as to foreign
investment enterprises, the Renminbi became fully convertible
for current account items, including profit distributions,
interest payments and receipts and expenditures from trade.
Conversion into U.S. dollars is based on the rate set by The
People's Bank of China (which is based on the previous day's PRC
interbank foreign exchange market rate and with reference to
currency exchange rates on the world financial markets). Certain
ministerial approvals are needed to acquire foreign exchange for
a current account transaction. Strict foreign exchange controls
continue for capital account transactions (including repayment
of loan principal and return of direct capital investments and
transactions in investments in negotiable securities). In the
past, there have been shortages of U.S. dollars or other foreign
currency available for conversion of Renminbi, and it is
possible such shortages could recur, or that restrictions on
conversion could be reimposed in the future at times when the
Company is seeking to convert Renminbi. Prior to 1994, the
Renminbi experienced a significant net devaluation against most
major currencies, and during certain periods, significant
volatility in the market-based exchange rate. Since the
beginning of 1994, the Renminbi to U.S. dollar exchange rate has
largely stabilized. However, there can be no assurance that the
Chinese government will not devalue the Renminbi, that such
exchange rate will otherwise remain stable (particularly in
light of the recent currency crisis experienced by a number of
other Asian countries), that the Company will continue to be
able to remit foreign currency abroad or that the Company will
be able to convert sufficient amounts of Renminbi in China's
foreign exchange markets to meet its future needs.
Additionally, there can be no assurance that approvals for
exchange transactions will be available in the future or, if
available, will be granted to the Company. The Chinese
government has issued certain international loan procedures (the
"Procedures") that apply to foreign invested enterprises,
including Chinese-foreign equity and cooperative joint ventures.
The Procedures may require the approval of China's State
Administration of Exchange ("SAFE") for certain international
loans to foreign invested enterprises extended in connection
with project finance transactions, as well as the terms of such
transactions. The Company plans to obtain funds for certain
development projects through project finance transactions.
There can be no assurance that SAFE approval for such
transactions, if necessary, can be obtained at all or on terms
advantageous to the Company. The failure of the Company to
obtain SAFE approval for such transactions, if required, could
adversely affect the Company's ability to fund its operations.
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 Consolidated 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 Prospectus.
Qualified Accountants' Report
- -----------------------------
In reporting on the Company's audited consolidated
financial statements and XCL-China's audited financial statements
as of and for the fiscal years ended December 31, 1997 and 1996,
the report of the Company's independent accountants contained an
explanatory paragraph indicating factors which create substantial
doubt about the Company's and XCL-China's ability to continue as
a going concern. Such factors include the Company's ability to
generate additional cash flows to satisfy its development and
exploratory obligations with respect to its China properties.
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.
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.
Fraudulent Conveyance
- ---------------------
The Old Notes are and the Exchange Notes will be secured by
a pledge of all of the outstanding capital stock of XCL-China and
any other future Subsidiary Guarantors and an unconditional
guarantee by XCL-China and any other future Subsidiary
Guarantors. Under certain circumstances other Restricted
Subsidiaries will be obligated to unconditionally guarantee such
obligations of the Company. Various fraudulent conveyance laws
enacted for the protection of creditors may apply to the Notes
and the Subsidiary Guarantors' issuance of the Subsidiary
Guarantees. To the extent that a court were to find that (x) the
obligations under the Notes or the Subsidiary Guarantees were
incurred by the Company or the Subsidiary Guarantor,
respectively, with actual intent to hinder, delay or defraud any
present or future creditor or (y) the Company or such Subsidiary
Guarantor did not receive fair consideration or reasonably
equivalent value for issuing the Notes or the Subsidiary
Guarantee, respectively, and the Company or such Subsidiary
Guarantor (i) was insolvent, (ii) was rendered insolvent by
reason of the issuance of the Notes or the Subsidiary Guarantee,
respectively, (iii) was engaged or about to engage in a business
or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business or (iv)
intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they matured, the court could
avoid or subordinate the Notes or the Subsidiary Guarantee in
favor of the Company's or the Subsidiary Guarantor's respective
creditors. Among other things, a legal challenge of a Subsidiary
Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a
result of the issuance by the Company of the Notes. To the
extent any Notes or Subsidiary Guarantees were avoided as a
fraudulent conveyance or held unenforceable for any other reason,
the claims of holders of the Notes against the Company and the
shares of XCL-China pledged as security for the Notes would be
adversely affected and such holders would, to such extent, be
unsecured creditors of the Company. To the extent the claims of
the holders of the Notes against the Company were recharacterized
as unsecured claims, they would be ranked pari passu in right of
payment with all unsecured debt of the Company. To the extent
the claims of the holders of the Notes against the issuer of an
invalid Subsidiary Guarantee were subordinated, they would be
subject to the prior payment of all liabilities of such
Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets
to satisfy the claims of the holders of the Notes relating to any
voided portion of any of the Notes or Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the law applied in any
such proceeding. Under one measure, the Company or the
Subsidiary Guarantor, as the case may be, may be considered
insolvent if the sum of its debts, including contingent
liabilities, exceeded the fair market value of all of its assets
at a fair valuation or if the present fair market value of its
assets was less than the amount that would be required to pay its
probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature.
Based upon financial and other information, the Company
believes that the Notes and the Subsidiary Guarantees have been
or, when issued, will be, issued for proper purposes and in good
faith and that the Company is, and each Subsidiary Guarantor is,
or in the case of future Subsidiary Guarantors, will be, solvent
and will continue to be solvent after issuing the Notes and its
Subsidiary Guarantee, will have sufficient capital for carrying
on its business after such issuance and will be able to pay its
debts as they mature. There can be no assurance, however, that a
court passing on such standards would agree with the Company.
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. The Company does not
have an employment contract with Mr. Miller or with any other
officer or employee, other than employment agreements or similar
arrangements with certain operational employees of the Company's
subsidiaries. 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 existing trading market for the Notes. Although
the Initial Purchaser has advised the Company that it currently
intends to make a market in the Notes, it is not obligated to do
so and it may discontinue such market-making at any time without
notice. In addition, such market-making activity may be limited
during the Exchange Offer. There can be no assurance as to the
development of any market or the liquidity of any market that may
develop for the Notes. The Company and any Subsidiary Guarantors
were obligated to file, within 60 days after the Trigger Date, a
registration statement under the Securities Act with respect to
the Exchange Notes and to use their best efforts to have such
registration statement declared effective by the Commission
within 150 days after the Trigger Date. The Company did not file
the Exchange Offer Registration Statement within the required
time period and the Exchange Offer Registration Statement was not
declared effective within the required time period. The
Commission has broad discretion to determine whether any
registration statement will be declared effective and may delay
or deny the effectiveness of any such registration statement
filed by the Company for a variety of reasons. Failure to have
the registration statement declared effective could adversely
affect the liquidity and price of the Notes. As a result of the
failure of the Company and any Subsidiary Guarantors to comply
with their registration obligations with respect to the Exchange
Notes in a timely manner, the Company will be required to pay
additional interest on the Notes, as liquidated damages, until
such obligations are complied with. See "Description of the
Notes -- Registration Rights."
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 and has upgraded certain of its software to software that
purports to be Year 2000 compliant. 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, the Company presently believes that the Year 2000
problem will not pose significant operational problems for its
computer systems. The Company is not able to estimate the total
costs of undertaking Year 2000 remedial activities, if they will
be required. However, based upon information developed to date,
it believes that the total cost of Year 2000 remediation will not
be material to the Company's cash flow, results of operation or
financial condition. 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 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 in the fourth quarter of 1998. The Company
expects to complete its Year 2000 review and, if required,
remediation efforts within a time frame that will enable its
computer-based and embedded chip systems to function without
significant disruption in the Year 2000. 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.
PRIVATE PLACEMENT
On May 20, 1997, the Company consummated (i) a private
offering (the "Note Offering") of 75,000 units (the "Note
Units"), each consisting of $1,000 principal amount of the Old
Notes and one Common Stock Purchase Warrant (collectively, the
"Note Warrants") to purchase 85 shares of the Company's common
stock and (ii) a private offering of 294,118 units (the "Equity
Units," and together with the Note Units, the "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 21 shares of
the Company's common stock, as adjusted for a one-for-fifteen
stock split effective December 17, 1997 (the "Reverse Stock
Split") (the "Prior Equity Offering," and together with the Note
Offering, the "Offerings"). 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. As partial compensation, the Initial Purchaser was
issued 15,006 Common Stock Purchase Warrants ("Additional
Warrants") to purchase 85.333 shares of Common Stock, as adjusted
for the Reverse Stock Split.
The proceeds of the Note Offering were deposited in cash
collateral accounts pending approval of the ODP by the requisite
Chinese governmental authority. The ODP was approved in principle
and on October 15, 1997 the proceeds of the Note Offering were
released to the Company.
The Company has applied or will apply the $91.5 million in
net proceeds received from the Offerings (after deducting
offering fees and expenses payable by the Company of $8.5
million) as follows: (i) approximately $41 million to repay
indebtedness; (ii) approximately $21 million for capital
expenditures; (iii) approximately $1.7 million for investments;
(iv) approximately $15 million ($14.6 million escrowed) for
payment of interest on the Notes through November 1, 1998; and
(v) approximately $12.8 million for additional working capital
for general corporate purposes.
THE EXCHANGE OFFER
General
- -------
In connection with the sale of the Old Notes, the purchasers
thereof became entitled to the benefits of certain registration
rights under the Registration Rights Agreement. The Exchange
Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Rights
Agreement. See "Description of Notes -- Registration Rights."
For each $1,000 principal amount of Old Notes surrendered to
the Company pursuant to the Exchange Offer, the holder of such
Old Notes will receive $1,000 principal amount of Exchange Notes.
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal, the
Company will accept all Old Notes properly tendered prior to 5:00
p.m., New York City time, on the Expiration Date. Holders may
tender some or all of their Old Notes pursuant to the Exchange
Offer in integral multiples of $1,000 principal amount.
Under existing interpretations of the staff of the SEC,
including Exxon Capital Holdings Corporation, SEC No-Action
Letter (available April 13, 1989), the Morgan Stanley Letter and
Mary Kay Cosmetics, Inc., SEC No-Action Letter (available June 5,
1991), the Company believes that the Exchange Notes would in
general be freely transferable after the Exchange Offer without
further registration under the Securities Act by the respective
holders thereof (other than a "Restricted Holder") without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such holder's
business and such holder is not participating in, and has no
arrangement with any person to participate in, a distribution
(within the meaning of the Securities Act) of such Exchange
Notes. Eligible holders wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met.
Any holder of Old Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes
could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action
letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with
any resale transaction. In addition, a Restricted Holder is (i)
a broker-dealer who purchased Old Notes exchanged for such
Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the Company within
the meaning of Rule 405 under the Securities Act. Such persons
will be subject to restrictions on resales or transfers of the
Exchange Notes.
Each holder of Old Notes who wishes to exchange Old Notes
for Exchange Notes in the Exchange Offer will be required to make
certain representations, including (i) that any Exchange Notes to
be received by it will be acquired in the ordinary course of its
business, (ii) that at the time of the commencement of the
Exchange Offer it has not entered into any arrangement or
understanding with any person to participate in the distribution
(within the meaning of Securities Act) of the Exchange Notes in
violation of the Securities Act, (iii) that it is not an
"affiliate" (as defined in Rule 405 promulgated under the
Securities Act) of the Company or any of the Subsidiary
Guarantors, (iv) if such holder is not a broker-dealer, that it
is not engaged in, and does not intend to engage in, the
distribution of Exchange Notes and (v) if such holder is a broker-
dealer (a "Participating Broker-Dealer") that will receive
Exchange Notes for its own account in exchange for Notes that
were acquired as a result of market-making or other trading
activities, that it will deliver a prospectus in connection with
any resale of such Exchange Notes. Each of the Company and any
Subsidiary Guarantors will make available, during the period
required by the Securities Act, a prospectus meeting the
requirements of the Securities Act for use by Participating
Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of
Exchange Notes. The staff of the SEC has taken the position in
no-action letters issued to third parties including Shearman &
Sterling, SEC No-Action Letter (available July 2, 1993), that
Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of
Old Notes) with this Prospectus, as it may be amended or
supplemented from time to time. Under the Registration Rights
Agreement, the Company is required to allow Participating Broker-
Dealers to use this Prospectus, as it may be amended or
supplemented from time to time, in connection with the resale of
such Exchange Notes. See "Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated
upon the earlier to occur of (i) the Company having exchanged
Exchange Notes for all outstanding Old Notes (other than Old
Notes held by a Restricted Holder) pursuant to the Exchange Offer
and (ii) the Company having exchanged, pursuant to the Exchange
Offer, Exchange Notes for all Old Notes that have been tendered
and not withdrawn on the date that is 30 days following the
commencement of the Exchange Offer. In such event, holders of
Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the
securities laws, including the Securities Act.
As of the date of this Prospectus, $75,000,000 aggregate
principal amount of Old Notes are issued and outstanding. In
connection with the issuance of the Old Notes, the Company
arranged for the Old Notes to be eligible for trading in the
Private Offering, Resale and Trading through Automated Linkages
(PORTAL) Market, the National Association of Securities Dealers'
screen based, automated market trading of securities eligible for
resale under Rule 144A.
The Company shall be deemed to have accepted for exchange
validly tendered Old Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent. See "--
Exchange Agent." The Exchange Agent will act as agent for the
tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to
such holders. If any tendered Old Notes are not accepted for
exchange because of an invalid tender or the occurrence of
certain other events set forth herein, certificates for any such
unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the
Expiration Date. Holders of Old Notes who tender in the Exchange
Offer will not be required to pay brokerage commissions or fees
or, subject to the instructions in the Letter of Transmittal,
transfer taxes with respect to the exchange of Old Notes pursuant
to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See "-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of
Transmittal, is being sent to all registered holders as of the
date of this Prospectus.
Expiration Date; Extensions; Amendments
- ---------------------------------------
The term "Expiration Date" shall mean [_____________, 1998]
unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the
latest date to which the Exchange Offer is extended. In order to
extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to
the record holders of Old Notes an announcement thereof, each
prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Such
announcement may state that the Company is extending the Exchange
Offer for a specified period of time. The Company reserves the
right (i) to delay acceptance of any Old Notes, to extend the
Exchange Offer or to terminate the Exchange Offer and to refuse
to accept Old Notes not previously accepted, if any of the
conditions set forth herein under "-- Termination" shall have
occurred and shall not have been waived by the Company (if
permitted to be waived by the Company), by giving oral or written
notice of such delay, extension or termination to the Exchange
Agent, and (ii) to amend the terms of the Exchange Offer in any
manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Old Notes of
such amendment. Without limiting the manner in which the Company
may choose to make public announcements of any delay in
acceptance, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement,
other than by making a timely release to the Dow Jones News
Service.
Interest on the Exchange Notes
- ------------------------------
The Exchange Notes will bear interest payable semi-annually
on May 1 and November 1 of each year, commencing May 1, 1999
(assuming the Exchange Notes are not issued before November 1,
1998). Holders of Exchange Notes of record on April 15, 1999
will receive interest on May 1, 1999 from the date of issuance of
the Exchange Notes, plus an amount equal to the accrued interest
on the Old Notes from November 1, 1998 to the date of exchange
thereof plus additional interest ("Additional Interest") as a
result of the late filing and effectiveness of the Exchange Offer
Registration Statement as described in "Registration Rights"
below. Consequently, assuming the Exchange Offer is consummated
prior to the record date in respect of the May 1, 1999 interest
payment for the Old Notes, holders who exchange their Old Notes
for Exchange Notes will receive the same interest payment on May
1, 1999 that they would have received had they not accepted the
Exchange Offer plus any accrued Additional Interest. Interest on
the Old Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
Procedures for Tendering
- ------------------------
To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, or an Agent's Message together
with the Old Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. In addition, either (i) the certificates for
such Old Notes must be received by the Exchange Agent along with
the Letter of Transmittal or (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Old Notes,
if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to
the Expiration Date or (iii) the holder must comply with the
guaranteed delivery procedures described below. The tender by a
holder of Old Notes will constitute an agreement between such
holder and the Company in accordance with the terms and subject
to the conditions set forth herein and in the Letter of
Transmittal. Delivery of all documents must be made to the
Exchange Agent at its address set forth herein. Holders may also
request that their respective brokers, dealers, commercial banks,
trust companies or nominees effect such tender for such holders.
The term "Agent's Message" means a message, transmitted by
the Book-Entry Transfer Facility to, and received by, the
Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that such Book-Entry Transfer Facility has received
an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are the subject of
such Book-Entry Confirmation that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal,
and that the Company may enforce such agreement against such
participant.
The method of delivery of Old Notes and the Letter of
Transmittal and all other required documents to the Exchange
Agent is at the election and risk of the holders. Instead of
delivery by mail, it is recommended that holders use an overnight
or hand delivery service. In all cases, sufficient time should
be allowed to assure timely delivery. No Letter of Transmittal
or Old Notes should be sent to the Company. Only a holder of Old
Notes may tender such Old Notes in the Exchange Offer. The term
"holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company
or any other person who has obtained a properly completed stock
power from the registered holder.
Any beneficial holder whose Old Notes are registered in the
name of such holder's broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such registered
holder to tender on behalf of the beneficial holder. If such
beneficial holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such
holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take
considerable time. If the Letter of Transmittal is signed by the
record holder(s) of the Old Notes tendered thereby, the signature
must correspond with the name(s) written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If the Letter of Transmittal is signed by a participant in
Depositary Trust Company ("DTC"), the signature must correspond
with the name as it appears on the security position listing as
the holder of the Old Notes. Signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, must
be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an
office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under
the Exchange Act (an "Eligible Institution") unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder
(or by a participant in DTC whose name appears on a security
position listing as the owner) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal and the Exchange Notes
are being issued directly to such registered holder (or deposited
into the participant's account at DTC) or (ii) for the account of
an Eligible Institution. If the Letter of Transmittal is signed
by a person other than the registered holder of any Old Notes
listed therein, such Old Notes must be endorsed or accompanied by
appropriate bond powers which authorize such person to tender the
Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on
the Old Notes. If the Letter of Transmittal or any Old Notes or
bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons
should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date
when the tendering holder's duly signed Letter of Transmittal
accompanied by Old Notes (or a timely confirmation received of a
book-entry transfer of Old Notes into the Exchange Agent's
account at DTC with an Agent's Message) or a Notice of Guaranteed
Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes
tendered pursuant to a Notice of Guaranteed Delivery by an
Eligible Institution will be made only against delivery of the
Letter of Transmittal (and any other required documents) and the
tendered Old Notes (or a timely confirmation received of a book-
entry transfer of Old Notes into the Exchange Agent's account at
DTC) with the Exchange Agent.
All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of the
tendered Old Notes will be determined by the Company in its sole
discretion, which determination will be final and binding. The
Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the absolute
right to waive any conditions of the Exchange Offer or defects or
irregularities in tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of
Transmittal) shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agency nor any
other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes
nor shall any of them incur any liability for failure to give
such notification. Tenders of Old Notes will not be deemed to
have been made until such irregularities have been cured or
waived. Any Old Notes received by the Exchange Agent that are
not properly tendered and also to which the defects or
irregularities have not been cured or waived will be returned
without cost by the Exchange Agent to the tendering holder of
such Old Notes unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration
Date. In addition, the Company reserves the right in its sole
discretion to (i) purchase or make offers for any Old Notes that
remain outstanding subsequent to the Expiration Date, or, as set
forth under "--Termination," to terminate the Exchange Offer and
(ii) to the extent permitted by applicable law, purchase Old
Notes in the open market, privately negotiated transactions or
otherwise. The terms of any such purchases or offers may differ
from the terms of the Exchange Offer.
Book-Entry Transfer
- -------------------
The Exchange Agent will establish an account with respect to
the Old Notes at DTC within two business days after the date of
this Prospectus, and any financial institution which is a
participant in DTC may make book-entry delivery of the Old Notes
by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such
transfer. Although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an
Agent's Message must be transmitted to and received by the
Exchange Agent on or prior to the Expiration Date at one of its
addresses set forth below under "--Exchange Agent," or the
guaranteed delivery procedure described below must be complied
with. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT. All references in this Prospectus to
deposit or delivery of Old Notes shall be deemed to include DTC's
book-entry delivery method.
Guaranteed Delivery Procedures
- ------------------------------
Holders who wish to tender their Old Notes and whose Old
Notes are not immediately available or who cannot deliver their
Old Notes, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Expiration Date, or
who cannot complete the procedure for book-entry transfer on a
timely basis and deliver an Agent's Message, may effect a tender
if: (i) the tender is made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly complete
and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and
address of the holder of the Old Notes, the registration number
or numbers of such Old Notes (if applicable), and the total
principal amount of Old Notes tendered, stating that the tender
is being made thereby and guaranteeing that, within five business
days after the Expiration Date, the Letter of Transmittal,
together with the Old Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's
account at DTC) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with
the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal, together with the certificate(s)
representing all tendered Old Notes in proper form for transfer
(or a confirmation of such a book-entry transfer) and all other
documents required by the Letter of Transmittal are received by
the Exchange Agent within five business days after the Expiration
Date.
Terms and Conditions of the Letter of Transmittal
- -------------------------------------------------
The Letter of Transmittal contains, among other things,
certain terms and conditions which are summarized below and are
part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be
required to represent that any Exchange Notes received by it will
be acquired in the ordinary course of its business, that such
holder is not participating in, and has no agreement with any
person to participate in, the distribution (within the meaning of
the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a
timely confirmation of a book-entry transfer of such Old Notes
into the Exchange Agent's account at DTC) must be received by the
Exchange Agent, with the Letter of Transmittal or an Agent's
Message and any other required documents, by the Expiration Date
or within the time periods set forth above pursuant to a Notice
of Guaranteed Delivery from an Eligible Institution. Each holder
tendering the Old Notes for exchange sells, assigns and transfers
the Old Notes to the Exchange Agent, as agent of the Company, and
irrevocably constitutes and appoints the Exchange Agent as the
holder's agent and attorney-in-fact to cause the Old Notes to be
transferred and exchanged. The holder warrants that it has full
power and authority to tender, exchange, sell, assign and
transfer the Old Notes and to acquire the Exchange Notes issuable
upon the exchange of such tendered Old Notes, that the Exchange
Agent, as agent of the Company, will acquire good and
unencumbered title to the tendered Old Notes, free and clear of
all liens, restrictions, charges and encumbrances, and that the
Old Notes tendered for exchange are not subject to any adverse
claims when accepted by the Exchange Agent, as agent of the
Company. The holder also warrants and agrees that it will, upon
request, execute and deliver any additional documents deemed by
the Company or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment and transfer of the Old
Notes. All authority conferred or agreed to be conferred in the
Letter of Transmittal by the holder will survive the death,
incapacity or dissolution of the holder and any obligation of the
holder shall be binding upon the heirs, personal representatives,
successors and assigns of such holder.
Withdrawal of Tenders
- ---------------------
Except as otherwise provided herein, tenders of Old Notes
may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the business day prior to the Expiration Date, unless
previously accepted for exchange. To withdraw a tender of Old
Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City
time, on the business day prior to the Expiration Date and prior
to acceptance for exchange thereof by the Company. Any such
notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including, if
applicable, the registration number or numbers and total
principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied
by documents of transfer sufficient to permit the Trustee with
respect to the Old Notes to register the transfer of such Old
Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor and (v) if
applicable because the Old Notes have been tendered pursuant to
the book-entry procedures, specify the name and number of the
participant's account at DTC to be credited, if different than
that of the Depositor. All questions as to the validity, form
and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be
issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable
after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered
by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration
Date.
Termination
- -----------
Notwithstanding any other term of the Exchange Offer, the
Company will not be required to accept for exchange any Old Notes
not theretofore accepted for exchange, and may terminate the
Exchange Offer if it determines that (i) the Exchange Offer
violates any applicable law or interpretation of the staff of the
SEC; (ii) an action or proceeding has been instituted or
threatened in any court or by any governmental agency which might
materially impair the ability of the Company to proceed with the
Exchange Offer or (iii) governmental approvals which the Company
deems necessary for the consummation of the Exchange Offer have
not been obtained.
If the Company determines that it may terminate the Exchange
Offer, as set forth above, the Company may (i) refuse to accept
any Old Notes and return any Old Notes that have been tendered to
the holders thereof, (ii) extend the Exchange Offer and retain
all Old Notes tendered prior to the Expiration of the Exchange
Offer, subject to the rights of such holders of tendered Old
Notes to withdraw their tendered Old Notes or (iii) waive such
termination event with respect to the Exchange Offer and accept
all properly tendered Old Notes that have not been withdrawn. If
such waiver constitutes a material change in the Exchange Offer,
the Company will disclose such change by means of a supplement to
this Prospectus that will be distributed to each registered
holder of Old Notes, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon
the significance of the waiver and the manner of disclosure to
the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period. Holders of Old Notes
will have certain rights against the Company under the
Registration Rights Agreement should the Company fail to
consummate the Exchange Offer.
Exchange Agent
- --------------
State Street Bank and Trust Company, the trustee under the
Indenture, has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as
follows:
By Mail: By Hand or Overnight Courier:
State Street Bank and State Street Bank
and Trust Company and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 Fourth Floor
Boston, MA 02102-0078 Two International Place
Boston, MA 02110
Facsimile Transmission: (617) 664-5739
Confirm by Telephone: (617) 664-5456
Fees and Expenses
- ------------------
The expenses of soliciting tenders pursuant to the Exchange
Offer will be borne by the Company. The principal solicitation
for tenders pursuant to the Exchange Offer is being made by mail.
Additional solicitations may be made by officers and regular
employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments
to brokers, dealers or other persons soliciting acceptances of
the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket
expenses in connection therewith. The Company may also pay
brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Prospectus, Letters of Transmittal and
related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and
Trustee and accounting and legal fees, will be paid by the
Company. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If, however, Exchange Notes or Old Notes not tendered or
accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such
tendering holder.
Accounting Treatment
- --------------------
No gain or loss for accounting purposes will be recognized
by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company
over the term of the Exchange Notes under generally accepted
accounting principles.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the
issuance of the Exchange Notes offered hereby. In consideration
for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange a like principal
amount of Old Notes, the terms of which are identical in all
material respects to the Exchange Notes. The Old Notes
surrendered in exchange for the Exchange Notes will be retired
and canceled and cannot be reissued. Accordingly, issuance of
the Exchange Notes will not result in any change in
capitalization of the Company.
FINANCIAL RESTRUCTURING
The Company has recently taken steps to simplify its capital
structure. Effective November 10, 1997, the Company recapitalized
and combined its outstanding shares of Series A, Cumulative
Convertible Preferred Stock and Series E, Cumulative Convertible
Preferred Stock into an aggregate of 790,613 shares of Amended
Series A, Cumulative Convertible Preferred Stock (including
accrued and unpaid dividends paid in kind). As of September 30,
1998 there were 1,181,614 shares of Amended Series A Preferred
Stock issued and outstanding with an aggregate liquidation
preference of approximately $100 million. Effective January 16,
1998, the Series F, Cumulative Convertible 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." As of September 30, 1998, there were 48,405
shares of Amended Series B Preferred Stock issued and outstanding
with an aggregate liquidation preference of approximately $4.8
million. 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."
CAPITALIZATION
The following table sets forth the total consolidated
capitalization of the Company at June 30, 1998. 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 $ 2,074
Total debt, including current maturities:
13.50% Senior Secured Notes due
May 1, 2004, net of unamortized discount 62,384
--------
Total debt $ 64,458
--------
Shareholders' equity:
Preferred stock
Amended Series A Preferred Stock $ 1,182
Amended Series B Preferred Stock 48
Common Stock (1) 230
Treasury stock (69,471 shares) (1)
Unearned compensation (2) (11,702)
Additional paid-in capital 304,195
Accumulated deficit (256,153)
--------
Total shareholders' equity $ 37,799
--------
Total capitalization $ 102,257
========
____________________
(1) Excludes shares of Common Stock issuable upon conversion
of Preferred Stock or exercise of outstanding options and
warrants at June 30, 1998. See "Description of Capital
Stock."
(2) Represents unearned compensation related to employee
stock option awards and is being amortized over the period
earned. (See Note 9 to the Consolidated Financial Statements
for the year end December 31, 1997.)
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 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 5.00 3.31
Third Quarter 4.13 2.75
1997
- ----
First Quarter $ 5.63 $ 2.81
Second Quarter 4.69 2.81
Third Quarter 6.56 2.81
Fourth Quarter 13.13 3.85
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 September 30, 1998, the closing price for the Common
Stock on the AMEX was $3.00. As of September 30, 1998, the
Company had approximately 3,480 shareholders of record with
respect to its Common Stock.
DIVIDEND POLICY
XCL has not paid any cash dividends on the Common Stock
to date and has no plans for Common Stock cash dividend payments
in the foreseeable future. The payment of future dividends will
depend on the Company's future earnings and financial condition.
The Company is restricted from paying cash dividends on its
equity securities under the terms of the Indenture. Dividends on
the Company's Preferred Stock have been paid in kind. In the
event of any dividend defaults on the outstanding shares of
Preferred Stock, under the terms of such Stock the Company would
be restricted from paying cash dividends on the Common Stock for
so long as such dividend defaults continued. See "Description of
Notes -- Certain Amendments" and "Description of Capital Stock --
Preferred Stock" herein.
OIL AND GAS EXPLORATION AND PRODUCTION
PROPERTIES AND RESERVES
Production, Sales and Cost Data
- -------------------------------
The following table sets forth certain information regarding
the production volumes, revenues, average prices received and
average production costs associated with the Company's sale of
oil and gas from properties held for sale for the periods
indicated.
Year Ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
Net Production: (a)
Gas (MMcf) 72 467 1,474
Oil (MBbl) 4 9 19
Gas equivalent (MMcfe) 95 522 1,588
Oil and gas sales ($ 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 located on the Lutcher Moore Tract. (See
"Business -- Domestic Properties").
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 interests 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
after taking into account CNODC's 51% reversionary interest with
respect to the 5,911 acres in the C-D Initial Development Area
(in which CNODC has elected to participate) and before CNODC's
51% reversionary interest in the remaining gross acres (in which
CNODC has not yet elected to participate).
Undeveloped
-----------------
Gross Net (a)
----- -------
The People's Republic of China 48,677 22,831
_________________
(a) Net undeveloped acreage would be 11,926 acres if CNODC
elects to participate for its 51% reversionary interest in
the entire Zhao Dong Block.
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 .5 2 1.0
Nonproductive 1 0.5 -- -- 1 .5
---- ---- ----- ---- ---- ----
Total 3 1.5 1 .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.
Summary of Oil and Gas Reserve Data
- -----------------------------------
The following table sets forth summary information with
respect to the Company's estimated proved undeveloped oil
reserves and the estimated future net cash flows attributable
thereto. Unless otherwise noted, all information in this
Prospectus relating to oil reserves and the estimated future net
cash flows attributable thereto are based on estimates prepared
by the Company's independent petroleum engineers and are shown
net to the Company's interest. The estimated future undiscounted
net cash flows and the present value of estimated future net cash
flows were prepared using constant prices as of the calculation
dates. The present value of estimated future net cash flows were
discounted at 10% per annum on a pre-tax basis. The following
table also sets forth, for comparison purposes, the standardized
measure of discounted future net cash flows determined in
accorance with the rules prescribed by FASB No. 69.See "Risk
Factors -- Reliance on Estimates of Proved Reserves and Future
Net Revenue" and "Supplemental Oil and Gas Information" in the
Notes to the Consolidated Financial Statements.
Crude Oil (MBLs)
---------------------------------
1997(1) 1996 (1) 1995 (1)
------- -------- --------
Oil and Condensate 11,762 10,579 58
======= ======= ======
Estimated future pre-tax net
revenues (in thousands) $119,049 $142,860 $46,835
======== ======= ======
Present value of estimated
future net pre-tax revenues
(in thousands) $ 64,821 $ 79,062 $26,040
======= ======== ======
Standardized measure of
discounted future net cash
flows (in thousands) $ 53,848 $ 62,606 $26,040
======= ======= ======
_________________
(1) 1997 and 1996 represent China properties only. 1995
represents U.S. properties being held for sale only.
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 from the unaudited financial statements for the six
months ended June 30, 1998 and 1997, which have been prepared on
the same basis as the audited statements 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>
Six Months
Year Ended December 31 Ended June 30
---------------------------------------------------------------- ---------------------
1993(a) 1994(b) 1995(c) 1996(e) 1997(g)(j) 1997(j) 1998(j)
------- ------- ------- ------- ---------- ------- -------
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 8,499 $ 4,336 $ 2,480 $ 1,136 $ -- $ -- $ --
Operating expenses 2,449 1,341 985 342 -- -- --
General and administrative expenses 3,840 4,553 4,551 3,487 5,167 1,562 2,915
Depreciation, depletion and
amortization 5,788 3,292 2,266 579 -- -- --
Other, net -- -- -- -- 2,891 28 72
Operating loss (12,518) (33,875) (85,673) (9,793) (8,058) (1,590) (2,987)
Net interest expense 1,329 1,831 2,998 2,415 8,450 1,646 1,852
Interest income 141 508 133 8 2,212 498 718
Net loss (15,197) (36,622) (87,837) (12,074) (13,994) (2,426) (4,120)
Net loss attributable to common stock (19,978) (41,529) (92,658) (17,430) (27,722) (5,742) (8,999)
Net loss per common share
Basic (2.52) (3.14) (5.77) (0.98) (1.36) (.29) (.40)
Diluted (2.52) (3.14) (5.77) (0.98) (1.36) (.29) (.40)
Weighted average common
shares outstanding - basic 7,933 13,220 16,047 17,705 20,451 19,511 22,622
Weighted average common
shares outstanding - diluted 7,933 13,220 16,047 17,705 20,451 19,511 22,622
Deficiency of earnings to combined
fixed charges and preferred
stock dividends (i) (i) (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 $ (34,468) $ 5,972
Total assets 157,377 149,803 72,336 60,864 119,089 151,890 117,204
Long-term debt, net of current
maturities 53,965 (d) 41,607(d) 15,644 -- (f) 61,310(h) -- (f) 62,384(h)
Stockholders' equity 84,609 95,200 16,900 11,041 40,825 34,824 37,799
___________
(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 of $38.02 million at December 31,
1996 and $104.3 million at June 30, 1997 was classified as
currently due.
(g) Includes extraordinary loss for early extinguishment of
debt of $551,000.
(h) Long term debt is net of unamortized discount of $13.7
million and $12.6 million as of December 31, 1997 and June
30, 1998, respectively, associated with the value allocated
to the stock purchase warrants issued with the Notes.
(i) The earnings were inadequate to cover fixed charges.
The dollar amount of the coverage deficiency was $16.5
million in 1993; $38.5 million in 1994; $90.8 million in
1995; $14.5 million in 1996; and $22.4 million in 1997; $4.1
million for the six months ended June 30, 1997; and $6.0
million for the six months. ended June 30, 1998.
(j) Revenues and operating expenses associated with oil and
gas properties held for sale have become insignificant and,
accordingly, are recorded in other costs and operating
expenses in the accompanying consolidated statements of
operations.
</TABLE>
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 Consolidated Financial Statements. See also
the discussion on page [5] 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 Zhao
Dong Block and the Company's reserve assessments support this
decision. The Company has focused 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's only historic revenues have been from the Company's
financing activities and from properties previously sold and
those currently held for sale or investment. The Company is in
the development stage with respect to its operations in China and
has not generated any revenues from operations related to its
properties and interests in China.
The Company has made significant capital expenditures since
acquiring its interest in the Zhao Dong Block in 1992. Despite
incurring losses since 1992, the Company, because of the high
quality of the Zhao Dong Block, has been able to obtain all
required funds for the exploration and development of the Zhao
Dong Block.
On August 20, 1998, the Company entered into a production
sharing contract with CNODC for the 12,000-acre Zhang Dong Block.
On September 15, 1998, the contract was approved by the Ministry
of Foreign Trade and Economic Cooperation, effective October 1,
1998.
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 June 30, 1998,
the Company had an unrestricted operating cash balance of $11.4
million and restricted cash held in escrow for the payment of
interest on the Notes of $5.2 million. The Company had net
working capital of $6.0 million. These cash balances are not
sufficient to cover the Company's working capital requirements
and capital expenditure obligations on the Zhao Dong Block during
the remainder of 1998 and 1999.
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 $0.2 million versus
$1.1 million in 1996. The Company incurred a loss for fiscal
1997 of $14 million and expects to incur a loss in 1998 as well
because production and related cash flow from the Zhao Dong and
Zhang Dong Blocks are not expected until late 1999. For the six
months ended June 30, 1998, the Company had a net loss of 4.1
million.
Management's Plan
-----------------
The Company's unrestricted cash will be required for working
capital and exploration, development and production expenditures
on the Zhao Dong and Zhang Dong Blocks.
With respect to the Zhao Dong 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 as soon as reasonably
practicable. Except for certain 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 $2.0 million. The Company estimates that its share
of unpaid exploration expenses for the remainder of 1998 will be
approximately $5.0 million. The Company estimates that its share
of development expenses for 1999 will be approximately $22
million. The Company estimates its share of exploration expenses
of the remaining two obligatory wells to be drilled in 1999 is
approximately $6.0 million. The Company anticipates that in
addition to the two obligatory exploration wells to be drilled in
1999, additional exploration wells may be drilled during 1999.
The Company presently projects and plans that these funds will be
available from the sale or refinancing of domestic oil and gas
properties held for sale and/or investment in land, project
financing, increasing the amount of senior secured notes,
supplier financing, additional equity, including the exercise of
currently outstanding warrants to buy common stock, joint
ventures with other oil companies and proceeds from production.
Based on continuing discussions with major stockholders,
investment bankers, potential purchasers and other oil companies,
the Company believes that such required funds will be available.
However, there is not assurance such funds will be available and,
if available, on commercially reasonable terms. Any new debt
could require approval of the holders of the Company's Notes and
there is no assurance that such approval could be obtained. See
"Risk Factors."
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 Zhao Dong Block and to
determine whether the commencement of production from the C-4
Well area can be accelerated into the first half of 1999. 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 possible to
commence production from the C-4 well area in the first half of
1999. It is the Company's understanding that the Company, Apache
and CNODC have now all agreed to make every effort to achieve
initial production in the first half of 1999. The $28 million
estimated to be necessary for exploration and development in 1999
does not include the entire cost of accelerating production from
the C-4 Well area into the first part of 1999. The Company
estimates this would require additional expenditures of
approximately $1.0 million, which the Company believes it can
obtain from the sources described above.
The Company is the operator of the Zhang Dong Block and, as
such, is required to cover the costs of initial appraisal
drilling, upgrading production facilities and additional studies
of seismic data. The contract commits the Company to drill at
least one well during the first year. Under the contract, the
Company is entitled to 49% of the production. The Company
estimates that its minimum capital requirements over the next
year to satisfy the terms of the Zhang Dong contract are
approximately $8 million. Funds are expected to come from the
previously mentioned sources.
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.
If funds for the purposes described above are not available,
the Company may be required substantially to curtail its
operations or to sell or surrender all or part of its interest in
the Zhao Dong or the Zhang Dong Blocks and/or its other interests
in China in order to meet its obligations and continue as a going
concern.
The Company is not obligated to make any additional capital
payments to its lubricating oil and coalbed methane projects.
The Company is in discussions with the Chinese about expansion of
their lube oil venture. If these discussions are successfully
concluded, additional capital investments will be required by the
Company; however, at this time it is not known what the extent or
timing for such investments might be. Similarly, if the
Company's coalbed methane project becomes active and is
successful, the Company may make additional investments in that
business. Again, the extent and timing of such investment, if
any, is unknown at this time.
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. An additional $0.7 million of compensation expense
was recorded in the first six months of 1998.
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, "Disclosure
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
- ---------------------
The six month period ended June 30, 1998 compared to the six
month period ended June 30, 1997
- -----------------------------------------------------------------
During the six months ended June 30, 1998 and June 30, 1997,
the Company incurred net losses of $4.1 million and $2.4 million,
respectively.
Revenues and operating expenses associated with oil and gas
properties held for sale have become insignificant and
accordingly, are recorded in other costs and operating expenses
in the accompanying consolidated statement of operations.
Interest expense increased during the six months ended June
30, 1998, when compared with the same period in 1997, because of
increased debt and interest rates. Also included in interest
expense was amortization of warrant costs and debt issue costs on
the Senior Secured Notes issued in May 1997. Interest
capitalized for the comparable periods in 1998 and 1997 increased
because the oil and gas property base was larger, thus, reducing
net interest expense for the periods.
Preferred Stock dividends were $4.9 million for the six
months ended June 30, 1998, as compared to $3.3 million for the
same period in 1997. The increase is the result of the issuance
of additional shares in the equity offering concluded in May
1997. These dividends are paid in additional shares of Preferred
Stock at the option of the Company.
Interest income for the six months ended June 30, 1998 and
1997 was $0.7 million and $0.5 million, respectively. The
increase of $0.2 million in 1998 resulted from the short-term
investment of cash still available from the May 1997 debt and
equity offerings.
General and administrative expenses were $2.9 million for
the six months ended June 30, 1998, as compared to $1.6 million
for the same period in 1997. The increase of $1.3 million during
the six month period ended June 30, 1998, was primarily due to
increases in non-cash compensation charges related to stock and
appreciation options of $0.7 million (approved by shareholders in
December 1997), $0.4 million in legal and professional fees, and
$0.2 million in public company expenses. Legal and professional
fees increased because of additional services and public company
expenses associated with holding two shareholder meetings.
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 approximately $0.2 million,
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 Zhao Dong and Zhang Dong
Blocks, 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 approximately
$0.8 million was principally related to fees of approximately
$0.2 million on one lawsuit, an increase of approximately $0.3
million 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
$0.98 per share, compared to a net loss for fiscal 1995 of $87.8
million before preferred dividends of $4.8 million, or $5.77 per
share (as adjusted for the Reverse Stock Split). 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.
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 mid-1999 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
- -----------------
Since June 30, 1998, the Company entered into a production
sharing contract with CNODC for the 12,000-acre Zhang Dong Block.
See "Management's Plans" above. In addition, on August 26, 1998,
the Company, Apache and CNODC began drilling the C-5 exploration
well on the Zhao Dong Block and on August 26, 1998, they began
drilling the C-4-2 appraisal well on the Zhao Dong Block.
In September 1998, the Company exchanged (i) 15,000 Equity
Warrants from the May 20, 1997 Equity Offering, exercisable on or
after May 20, 1998 and before May 20, 2004, and entitling the
holder to purchase 351,015 shares of Common Stock at a price of
$3.09 per share and (ii) 24,015 Warrants issued on May 20, 1997,
in connection with interest payable on the Secured Subordinated
Notes due April 15, 2000, exercisable between May 20, 1998 and
November 1, 2000, at an exercise price of $3.09 per share, held
by an institutional holder, for new Warrants exercisable on or
before September 30, 1998 and entitling the holder to purchase
351,015 shares of restricted Common Stock at a price of $2.50 per
share. On September 17, 1998, the new Warrants were exercised,
as a result of which the Company received approximately $0.9
million and is to issue 351,015 shares of its restricted Common
Stock in an exempt private placement. The Warrant Exchange
Agreement provides that if at any time on or before March 15,
1999, any other holder of Equity Warrants from the May 20, 1997
Equity Offering is offered an exchange of such Warrants or an
amendment to such Warrants to provide for a more favorable
exercise provision than offered in the Warrant Exchange
Agreement, the party to the Warrant Exchange Agreement shall be
entitled to purchase additional shares of Common Stock at a price
of $0.01 per share in an amount that will make its effective
exercise price under the Warrant Exchange Agreement equivalent to
that provided to such other Warrant holder.
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 and has upgraded certain of its software to software that
purports to be Year 2000 compliant. 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, the Company presently believes that the Year 2000
problem will not pose significant operational problems for its
computer systems. The Company is not able to estimate the total
costs of undertaking Year 2000 remedial activities, if they will
be required. However, based upon information developed to date,
it believes that the total cost of Year 2000 remediation will not
be material to the Company's cash flow, results of operations or
financial condition.
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 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 in the fourth quarter of 1998. The Company expects to
complete its Year 2000 review and, if required, remediation
efforts within a time frame that will enable its computer-based
and embedded chip systems to function without significant
disruption in the Year 2000. 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.
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 Zhao Dong 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. Published information shows that the undeveloped
energy resources of China are extensive and that China's energy
needs are growing at a high rate. 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. The Company's excellent relationship with the Chinese
energy-related industry representatives should assist it in
remaining competitive in that country. See "The Zhao Dong Block,"
below. On August 20, 1998, the Company entered into a production
sharing contract with CNODC, effective October 1, 1998, for the
12,000-acre Zhang Dong Block. See "Zhang 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 June 30, 1998, the Company's employees totaled 26. No
employees are subject to any union contracts. The Company
believes it maintains good relations with its employees.
The Zhao Dong Block
- -------------------
Geology and Geophysics
----------------------
The Zhao Dong 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 km (roughly
50,000 gross acres). Geologic information suggests that a portion
of the Zhao Dong Block is a seaward extension of the Dagang oil
field complex which is one of China's largest. According to
statistics published by Wood McKenzie in the Southeast Asia
Report, Dagang has produced over 700 million barrels of oil and
has an estimated ultimate recovery of substantially more. The
Company has not verified this published information.
Tertiary formations constitute a major portion of the Zhao
Dong 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 Zhao Dong 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
Zhao Dong 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 Zhao
Dong 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 Zhao Dong Block.
The program covered approximately 100 square km 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 Zhao Dong
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 commenced in 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 Zhao Dong 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 Zhao
Dong 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 km
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 Zhao Dong
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.
1998 Drilling
-------------
Zhao Dong C-4-2. An appraisal well for the C-4 (the C-
4-2), located approximately 1.3 km south of the C-4, was
spudded in August 1998. The C-4-2 well is being drilled to
delineate the size of the reservoir encountered in the C-4
well. The well is expected to be drilled to a depth of
approximately 9,700 feet to test the Shahejie, Cretaceous
and Jurassic Sands encountered in the C-4 well.
Zhao Dong C-5. Also in August 1998, the C-5
exploration well located approximately 3 km southwest of the
D-2 well commenced drilling. The C-5 well was drilled to a
depth of 7,646 feet. No commercial oil and gas was
encountered and the well was plugged and abandoned.
Exploration Potential
- ---------------------
Reconnaissance seismic surveys on the Zhao Dong 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
(the Zhao Dong C-4-2, referred to above, which commenced drilling
in August 1998) to appraise the C-4 discovery and four
exploratory wells, at least two of which will be in the "C" and
"D" segments (and one of which was the Zhao Dong C-5, referred to
above). At least two of these wells are expected to be drilled
during the 1999 drilling season.
The Contract
- ------------
The Company acquired the rights to the exploration,
development and production of the Zhao Dong 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 Zhao Dong 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 minimum work requirements for seismic and the minimum
expenditures for the balance of the Contract have been met. This
leaves only the drilling requirements left to be satisfied. The
Foreign Contractor is required to drill three exploratory wells
prior to the expiration of the Exploration Period. This will
complete its requirements in the Exploration Period. These three
wells are approved in the 1998 work program and budget and,
subject to rig availability (and, as to one of the wells,
location approval), are expected to be drilled in 1998 or 1999.
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 Zhao Dong
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 Zhao Dong 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 Zhao Dong Block. The drilling and testing of the C-3, D-
1, D-2 and F-1 wells will satisfy the obligations regarding 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 Zhao Dong 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 Zhao Dong 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 Zhao Dong 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.
Accordingly, absent waiver from Apache, foreclosure on the shares
of XCL-China pledged to secure the Notes would trigger this
right, possibly impairing the ability of the Noteholders to
realize fully on their security. 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 the interest in the Zhao Dong Block or
XCL-China Ltd. ("XCL-China"), the XCL subsidiary holding XCL's
interest in the Zhao Dong 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.
Zhang Dong Block
- ----------------
On August 20, 1998, XCL (through its subsidiary XCL-Cathay
Ltd.) signed a production sharing contract with CNODC for the
12,000-acre Zhang Dong Block. On September 15, 1998, the contract
was approved by the Ministry of Foreign Trade and Economic
Cooperation of China, effective October 1, 1998. The Zhang Dong
Block is located North and adjacent to the Zhao Dong Block in the
offshore area of Bohai Bay. Dagang Petroleum (the subsidiary of
CNPC that operates onshore fields in this area) has drilled and
tested nine wells in the offshore Zhang Dong Block. All but one
of these wells have been drilled from an artificial island or a
causeway extending into the bay. All nine wells were tested with
five having commercial oil production rates, one well with gas
production, two wells with low oil production rates and one well
which produced water. The Company's review of production
information suggests that the wells were drilled with mud weights
that were considerably higher than necessary, which damaged the
producing formation and restricted the flow rates. Under the
contract, the Company is required in the next year at its expense
to drill one well, upgrade both the island and the causeway and
reprocess and reinterpret certain seismic data. If the Company
elects to extend the appraisal phase of the contract beyond the
first year, it may do so by committing to an additional two wells
during each of the next two-year periods (for a total commitment
of five wells over a five-year period). Development costs and
production will be shared 49% by the Company and 51% by CNODC.
XCL is designated as the operator.
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 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. 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 $1.5 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 report of Gruy, the Company's independent
engineering firm, net proved reserves in the C-D Field are
estimated to be 11.76 million barrels as of January 1, 1998.
CNODC has exercised its option to pay 51% of all development
costs and receive 51% of oil production. Consequently, the
Company's estimated present value of future pre-tax net cash
flows is $64.8 million. The standardized measure of discounted
future net cash flows is $53.8 million. Future reserve values
are based on year end prices and operating costs, production and
future development costs based on current costs with no
escalation. See "Risk Factors -- Reliance on Estimates of Proved
Reserves and Future Net Revenue" and "Supplemental Oil and Gas
Information" in the Notes to the Consolidated Financial
Statements.
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. On July 15, 1998, the
Company entered into a lease for approximately 1,649 square feet
of office space located at No. 1013, Office Tower 1, 138 Wang Fu
Jing Da Jie, Beijing, China. The lease expires July 15, 2000
(with an option to extend for an additional two years) and has a
monthly rental of $3,297 (payable in Chinese Renminbi).
Litigation
- ----------
During December 1993, the Company and two of its wholly-
owned subsidiaries, XCL-Texas, Inc. and XCL Acquisitions, Inc.,
were sued in separate law suits entitled Ralph Slaughter,
Secretary of the Department of Revenue and Taxation, State of
Louisiana 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 versus 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 these
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.
On January 24, 1997, a subsidiary of the Company filed an
action captioned L.M. Holding Associates, L.P. v. LaRoche
Chemicals, Inc. (23rd Judicial District Court, St. James Parish,
Louisiana, No. 24, 338, Section A). The lawsuit claims that
LaRoche failed to properly maintain its 8" brine line that runs
10 miles across the subsidiary's property in St. James Parish,
Louisiana, discharged brine from this line onto the subsidiary's
property and no longer has the right to operate said line. In
1998, the court issued a preliminary injunction enjoining LaRoche
from discharging brine onto the subsidiary's property and
enjoining LaRoche from continued operation of the 8" brine line
without a scientific system for early detection of leaks and
without periodic monitoring of the line. The Company is seeking
damages and cancellation of LaRoche's right to operate the brine
line. No trial date has been set. The Company intends to
vigorously prosecute the lawsuit.
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 October 1, 1998:
<TABLE>
<CAPTION>
Officer Director
Name Position Age Since Since
- ---------------------- -------------------------------------- ------ ----- -----
<S> <C> <C> <C> <C>
Marsden W. Miller, Jr. Chairman of the Board and Chief 57 1981 1981
Executive Officer of the Company
and Principal Accounting Officer (1)
John T. Chandler Vice Chairman of the Board of the 65 1982 1983
Company and Chairman and Chief
Executive Officer of XCL-China Ltd. (1)(4)
Danny M. Dobbs President and Chief Operating Officer 52 1991 --
of the Company and President of XCL-
China Ltd.(4)
Benjamin B. Blanchet Executive Vice President and Director 45 1997 1997
of the Company(1)
Richard K. Kennedy Vice President of Engineering of the 44 1989 --
Company
R. Carter Cline Vice President-Land of the Company 49 1990 --
Herbert F. Hamilton Executive Vice President Operations, 62 1995 --
XCL-China Ltd.(4)
Joseph T. K. Chan Vice President, XCL-China LubeOil 51 1998 --
Ltd.(5)
John H. Haslam Treasurer of the Company 56 1996 --
Lisha C. Falk Secretary of the Company 37 1997 --
Fred Hofheinz Director of the Company, Attorney at 60 -- 1991
Law(2)(3)
Arthur W. Hummel, Jr. Director of the Company, Independent 78 -- 1994
Consultant(2)(3)
Sir Michael Palliser Director of the Company, Independent 76 -- 1994
Consultant(2)(3)
Francis J. Reinhardt, Jr. Director of the Company, Partner in 68 -- 1992
Carl H. Pforzheimer & Co.(2)(3)
R. Thomas Fetters, Jr. Director of the Company, Independent 58 -- 1997
Consultant (2)(3)
Peter F. Ross Director of the Company, Chairman of 60 -- 1998
Dawnay Day Capital Markets
_______________
(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
twice 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 on the Zhao Dong Block.
(5) XCL-China LubeOil Ltd. is an International Business
Company incorporated under the laws of the British Virgin
Islands, wholly owned by the Company, which holds a 49%
interest in a joint venture with CNPC United LubeOil
Corporation for the production and sale of lubricants.
</TABLE>
Under the Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws of the Company, the
Board of 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, Fred
Hofheinz and Peter F. Ross.
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 a
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. 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.
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.
JOSEPH T. K. CHAN is Vice President of XCL-China LubeOil
Ltd., having joined the Company in 1998. Mr. Chan has more than
20 years experience in the oil industry with major American oil
companies. From August 1994 until joining the Company, Mr. Chan
was an agent and consultant for Asian importers of U.S. made
chemical, petrochemical and industrial products. From 1991 to
1994 he was Regional Manager of Sun Oil Far East, Inc. and Head
of Technical Support of China Sun Lubeoil joint venture plant in
Skekou, China and was responsible for regional sales, marketing
and production operations in Asia and the Pacific Rim under Sun
Oil Trading, Inc., a wholly owned subsidiary of Sun Oil Corp.
From 1988 to 1990, Mr. Chan was Marketing Director to De Huns
International Ltd. with chemicals and garment manufacturing
investments and operations in China. From 1986 to 1988, he
served as General Manager of Sales & Marketing and Technical
Services for U.K. based Castrol Oil Hong Kong. Mr. Chan served as
Divisional Import Manager for Li & Fung Trading in Taiwan,
Marketing Director of CDW Manufacturing Group in Hong Kong and
Project Manager of Cha Chi Ming (China Investment) Ltd. from 1982
to 1986. From 1976 to 1981, he served as Industrial Sales &
Marketing Manager for Caltex Oil Hong Kong, a joint venture of
Chevron and Texaco in Asia. From 1975 to 1976 he was Senior
Sales Engineer and Area Sales Manager for Drew Chemical
Corporation. Mr. Chan was employed with Esso Standard Oil Hong
Kong as International Sales Supervisor from 1972 to 1975 and as a
Marine and Aviation Sales and Technical Representative from 1970
to 1972. Mr. Chan holds a Bachelor of Commercial Science degree
from CH University of Hong Kong and has completed the Masters
Study Program from Caltex Management Institute in Indonesia. Mr.
Chan has also attended comprehensive training in lubeoil
engineering from the Esso Research Center in Abington Oxford, and
leadership and refinery operations programs with Texaco and
Chevron.
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 currently is a member of the Trilateral Commission, a
director of the Royal National Theatre, and 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 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, 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.
<TABLE>
<CAPTION>
Summary Compensation Table
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 ($) ($) sation($) (#) (#) ($) sation($)
---------- ----- ------- ---- -------- ---------- -------- ------- ---------
<C> <C> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1997 150,000 -- -- 1,000,000 -- -- --
Chairman and Chief -- 110,000
Executive Officer 1996 150,000 -- -- -- -- -- --
1995 150,000 -- -- -- -- -- --
John T. Chandler(4) 1997 150,000 -- -- 333,333 133,333 -- --
Vice Chairman; Chairman and 20,000 5,000
Chief Executive Officer 1996 150,000 -- -- -- -- -- --
of XCL-China Ltd. 1995 150,000 -- -- -- 8,000 -- --
Danny M. Dobbs 1997 136,875 -- -- -- 400,000 -- --
President and Chief Operating 25,000
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(5) 1997 144,000 -- -- -- -- -- --
Executive Vice President 1996 144,000 -- -- -- -- -- --
Operations, XCL-China Ltd. 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 nonqualified stock options for Common Stock and the
second line reflects nonqualified 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 on the Zhao
Dong Block.
(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).
Mr. Hamilton has been granted additional options in 1998.
See "Awards to Management" below.
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 PORTAL Market, as supplied by Jefferies, was $85.00 on
June 2, 1997. Mr. Miller's Appreciation Option (described below)
is not included in the following table because of the
indeterminate nature of the Award.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
_______________________________________________ ______________________________
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Granted to
Options/ Employees in Exercise or
SARs Fiscal Base Price Expiration
Name Granted(#) Year ($/Share) Date 0% ($) 5%($) 10%($)
---- ---------- ---------- ---------- ----------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. (1) 110,000* 64.7 85.00 June 1, 2007 -- 5,880,165 33,601,492
John 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
Danny M. Dobbs (3) 400,000+ 20.0 3.75 June 1, 2007 -- 637,294 4,904,287
Richard 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
Herbert F. Hamilton (5) -- -- -- -- -- -- --
*Amended Series A Preferred Stock
+Common Stock
</TABLE>
_______________
(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. 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.
(5) Effective June 30, 1998, Mr. Hamilton was granted an NSO
to purchase 150,000 shares of Common Stock at an exercise
price of $3.75 per share. These options are not included in
the table shown above.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised in-the-Money
on Value Options/SARs at Options/SARs
Name Exercise Realized Fiscal Year-End(#) Fiscal Year-End($)(4)(5)
----- --------- -------- ------------------------- --------------------------
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) -- --
-- -- -- (2) 5,000 (2) -- 558,332
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, 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. Additional options have been granted to Mr. Hamilton in 1998.
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.
<TABLE>
<CAPTION>
Long-Term Incentive Plans
Awards in Last Fiscal Year
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.
Material Federal Income Tax Effects
- ------------------------------------
The following is a general summary of the material 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. In January 1998 a bonus payment of $12,500 was paid to
Mr. Blanchet and used by him to pay the first installment on the
note.
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.
Effective June 30, 1998, Mr. Ross was granted nonqualified
stock options to purchase 66,666 shares of Common Stock
exercisable at $3.75 per share under the 1997 LTSIP Restatement.
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 contribution to the
Company's results, but should also be linked to the value
delivered to shareholders as reflected in the price of the
Company's Common Stock.
The Committee believes that the cash compensation of
executive officers, as well as other key employees, should be
competitive with other similarly situated companies while, within
the Company, being fair and discriminating on the basis of
personal performance. In general, in establishing total cash
compensation for its executives, the Committee has taken into
account the median cash compensation of executives employed by
competitors including some of the companies reflected in the peer
group identified in the Performance Graph 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 Presentation 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 September 30, 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;
1,181,614 shares of Amended Series A Preferred Stock; and
48,405 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> <C>
Cumberland Associates 2,070,669 (4) 8.30 146,793 12.42 -- --
1114 Avenue of the Americas
New York, New York 10036
KAIM Non-Traditional, L.P. 4,248,406(4)(5) 16.11 275,256(6) 23.29 48,405 100
1800 Avenue of the Stars,
2nd Floor
Los Angeles, California 90026
Mitch Leigh 1,987,539 (4)(7) 10.03 -- -- -- --
29 West 57th Street
New York, New York 10019
Marsden W. Miller, Jr. 1,665,713 (4)(8) 7.11 -- -- -- --
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508
Putnam Investment
Management, Inc. 8,882,773 (4)(9) 27.79 195,869 16.58 -- --
25 Braintree Hill Office Park
Braintree, MA 02184
_______________
(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 118,732 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.
(9) Putnam Investment Management, Inc. has shared voting and
investment power over securities held by accounts for which
Putnam Investment Management, Inc. serves as investment
adviser.
</TABLE>
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 September 30, 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 1,181,614 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
- ------------------------ ------------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1,665,713 (1)(2)(3)(4) 7.11 -- --
John T. Chandler 533,709 (1)(2)(3)(4) 2.31 20,000 (2) 0.02
Benjamin B. Blanchet 200 (5) -- -- --
Fred Hofheinz 23,332 (3) 0.10 -- --
Arthur W. Hummel, Jr. 23.332 (3) 0.10 -- --
Sir Michael Palliser 23,332 (3) 0.10 -- --
Francis J. Reinhardt, Jr. 57,464 (3)(6) 0.25 -- --
R. Thomas Fetters, Jr. 79,365 (4) 0.34 -- --
Peter F. Ross -- (3) -- -- --
All directors and officers of the
Company as a group (17 persons) 2,810,427 (1-6) 12.24 20,000 (2) 0.02
____________
(1) Includes 133,333 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.
</TABLE>
DESCRIPTION OF THE NOTES
The Old Notes were issued, and the Exchange Notes will be
issued, pursuant to an Indenture dated as of the Issue Date (the
"Indenture"), by and between the Company and Fleet National Bank,
as the original trustee (the "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 ("TIA").
The following summary of certain provisions of the Indenture does
not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the TIA, and to all of the
provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by
reference to the TIA as in effect on the date of the Indenture.
A copy of the form of Indenture (and the Pledge Agreement
referred to below) may be obtained from the Company or the
Initial Purchaser. The definitions of certain capitalized terms
used in the following summary are set forth below under "--
Certain Definitions."
General
- -------
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 of the Company 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 existing
Subsidiary Guarantees are, and, when issued, any future
Subsidiary Guarantees will be, general unsecured obligations of
the Subsidiary Guarantors and rank and will rank as the case may
be, pari passu in right of payment to all existing and future
unsubordinated indebtedness of the Subsidiary Guarantors and
senior in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees are and will be effectively subordinated to
any secured indebtedness of the Subsidiary Guarantors to the
extent of the value of the assets securing such indebtedness.
The Subsidiary Guarantees are full and unconditional.
The Old Notes were issued, and the Exchange Notes will be
issued only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. The
Notes will mature on May 1, 2004. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the
Exchange Notes. The Exchange Notes will bear interest at the
rate of 13.50% per annum, payable semi-annually on May 1 and
November 1 of each year, commencing May 1, 1999 (assuming the
Exchange Notes are not issued prior to November 1, 1998).
Holders (as defined below) of Exchange Notes of record on April
15, 1999 will receive interest on May 1, 1999 from the date of
issuance of the Exchange Notes, plus an amount equal to the
accrued interest on the Old Notes from November 1, 1998 to the
date of exchange thereof. In addition, Holders of record of
Exchange Notes on May 1, 1999 will receive Additional Interest as
described in "Registration Rights" below.
Principal of, premium, if any, and interest on the Notes
will be payable, and the Notes may be presented for registration
of transfer or exchange, at the office or agency of the Company
maintained for such purpose. At the option of the Company,
payment of interest on Notes not issued in book-entry form may be
made by check mailed to the holders of the Notes ("Holders") at
the addresses set forth upon the registry books of the Company.
No service charge will be made for any registration of transfer
or exchange of Notes, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Until otherwise designated by
the Company, the Company's office or agency will be the corporate
trust office of the Trustee presently located at 225 Asylum
Street, 23rd Floor, Hartford, CT 06103, Attention: Corporate
Trust Administration; Ref: XCL Ltd.
Any Old Notes that remain outstanding after completion of
the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single
class of securities under the Indenture. References to the Notes
in this "Description of the Notes" include the Old Notes and the
Exchange Notes unless the context otherwise requires.
Redemption
- ----------
Optional Redemption. The Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to
time, on and after May 1, 2002, upon not less than 30 nor more
than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on May 1 of
the years set forth below, plus, in each case, accrued and unpaid
interest, if any, thereon to the date of redemption:
Year Percentage
---- ----------
2002 106.75%
2003 and thereafter 100.00%
Optional Redemption upon Equity Offerings. At any time, or
from time to time, prior to May 1, 2002, the Company may, at its
option, use all or a portion of the net cash proceeds of one or
more Equity Offerings (as defined below) to redeem up to 35% of
the aggregate principal amount of the Notes originally issued at
a redemption price equal to 113.500% of the aggregate principal
amount of the Notes to be redeemed, plus accrued and unpaid
interest, if any, thereon to the redemption date; provided,
however, that at least $48.75 million aggregate principal amount
of Notes remains outstanding immediately after giving effect to
any such redemption (it being expressly agreed that for purposes
of determining whether this condition is satisfied, Notes owned
by the Company or any of its Affiliates shall be deemed not to be
outstanding). In order to effect the foregoing redemption with
the proceeds of any Equity Offering, the Company shall make such
redemption not more than 90 days after the consummation of any
such Equity Offering.
Selection and Notice of Redemption. In the event that less
than all of the Notes are to be redeemed at any time, selection
of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by
such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000
or less shall be redeemed in part; and provided, further, that if
a partial redemption is made with the proceeds of an Equity
Offering, selection of the Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis
or on as nearly a pro rata basis as is practicable (subject to
the procedures of The Depository Trust Company), unless such
method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed
at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed.
A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the applicable
redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption as long as the Company has
deposited with the paying agent for the Notes funds in
satisfaction of the applicable redemption price pursuant to the
Indenture.
Subsidiary Guarantees
- ---------------------
The Company and XCL-China have executed and delivered to the
Trustee a supplement to the Indenture pursuant to which XCL-China
(a "Subsidiary Guarantor") has fully and unconditionally
guaranteed, on a senior basis, to each Holder and the Trustee,
the full and prompt performance of the Company's obligations
under the Indenture and the Notes, including the payment of
principal of and interest on the Notes. Currently, XCL-China is
the only Subsidiary Guarantor, but under certain circumstances
other Restricted Subsidiaries will be obligated to fully and
unconditionally guarantee such obligations of the Company. See "-
- - Certain Covenants -- Additional Subsidiary Guarantees."
The obligations of each Subsidiary Guarantor will be limited
to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor and
after giving effect to any collections from or payments made by
or on behalf of any other Subsidiary Guarantor in respect of the
obligations of such other Subsidiary Guarantor under its
Subsidiary Guarantee or pursuant to its contribution obligations
under the Indenture, will result in the obligations of such
Subsidiary Guarantor under its Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under
Federal, state or foreign law. Each Subsidiary Guarantor that
makes a payment or distribution under its Subsidiary Guarantee
shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each
Subsidiary Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into
or sell its assets to the Company or another Subsidiary Guarantor
that is a Wholly Owned Restricted Subsidiary without limitation,
or with or to other Persons upon the terms and conditions set
forth in the Indenture. See "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets." In the event all of the
Capital Stock of a Subsidiary Guarantor is sold by the Company
and/or one or more of its Restricted Subsidiaries and the sale
complies with the provisions set forth in "-- Certain Covenants -
- - Limitation on Asset Sales," such Subsidiary Guarantor's
Subsidiary Guarantee will be released.
Security
- --------
Pursuant to the Indenture, on October 15, 1997, the Company
executed and delivered to the Trustee a Pledge Agreement (the
"Pledge Agreement"), pursuant to which the Company granted and
pledged to the Trustee, for the ratable benefit of the Holders of
the Notes, a security interest in all of the outstanding capital
stock of XCL-China to secure the performance of the obligations
of the Company under the Indenture and the Notes, and delivered
to the Trustee one or more certificates evidencing all of the
outstanding shares of capital stock of XCL-China, in a form
transferable by delivery. As of June 30, 1998, XCL-China had
total assets with a book value of approximately $68.6 million and
total liabilities of $5.2 million (excluding $66 million owed to
its parent), representing 59% and 7%, respectively, of the
Company's consolidated total assets and liabilities at such date.
The Indenture also provides that as long as any Notes remain
outstanding, the capital stock of any future Restricted
Subsidiary shall be pledged to secure the Notes. The Indenture
and the Pledge Agreement provide for the release of such pledged
shares under certain circumstances such as upon the discharge of
the Indenture or Legal Defeasance thereof, or the sale of all of
the pledged capital stock of a particular Restricted Subsidiary
in accordance with the provisions of the Indenture.
If the Notes become due and payable prior to the stated
maturity thereof or are not paid in full at the stated maturity
thereof, the Trustee may take all actions it deems necessary or
appropriate, including, but not limited to, foreclosing upon the
pledged shares of XCL-China capital stock as provided in the
Indenture and the Pledge Agreement. The proceeds received from
the sale of any pledged shares of XCL-China capital stock that
are the subject of a foreclosure shall be applied first to pay
the expenses of such foreclosure and amounts then payable to the
Trustee and thereafter to pay the principal of and interest on
the Notes. The Trustee has the power to institute and maintain
such suits and proceedings as it may deem expedient to prevent
impairment of, or to preserve or protect its and the Holders'
interest in, the pledged shares of XCL-China capital stock.
There can be no assurance that the Trustee will be able to
sell the pledged shares without substantial delays or that the
proceeds obtained will be sufficient to pay all amounts owing to
Holders of the Notes. Furthermore, there is some risk that the
Chinese government might take the position that its permission is
required for sales of the pledged shares. In addition, Apache
has a right of first refusal on the direct or indirect sale of
XCL's interest in the Zhao Dong Block, as well as an option to
purchase XCL's interest in the Zhao Dong Block (subject to
necessary Chinese approval) for the fair market value of that
interest. Apache's right to exercise this option is triggered by
certain defaults by XCL, the insolvency or liquidation of XCL or
XCL-China, or the transfer of more than a 49% interest in XCL-
China. The existence of or Apache's exercise of rights under its
right of first refusal or its option could have a negative
adverse impact on the Noteholders' ability to realize value from
their security. See "Business -- Apache Farmout."
Depending on the circumstances at the time, a sale of XCL-
China capital stock may require an effective registration
statement for such sale, which may not be available. There is no
requirement that XCL-China register such stock pursuant to a
shelf registration statement. The market price at which any
future sale of such stock will be effected may be influenced by
many factors, including, among others, investor perception, oil
and gas prices, conditions in the oil and gas industry, operating
results, and general economic and market conditions.
Registration Rights
- -------------------
The Company and the Initial Purchaser entered into a
registration rights agreement (the "Registration Rights
Agreement") pursuant to which the Company agreed to, and agreed
to cause any Subsidiary Guarantors to agree that they would, at
their cost, for the benefit of the Holders, (i) within 60 days
after the date of disbursement of the Collateral to the Company
pursuant to the Disbursement Agreement (the "Trigger Date"), file
the Exchange Offer Registration Statement with respect to the
Exchange Offer to exchange the Old Notes for the Exchange Notes
of the Company, guaranteed by any existing Subsidiary Guarantors
and secured by the same collateral as the Old Notes, which
Exchange Notes would have terms substantially identical in all
material respects to the Notes (except that the Exchange Notes
would not contain terms with respect to transfer restrictions or
liquidated damages) and (ii) cause the Exchange Offer
Registration Statement to be declared effective under the
Securities Act within 150 days after the Trigger Date. Upon the
Exchange Offer Registration Statement being declared effective,
the Company and any existing Subsidiary Guarantors agreed to
offer the Exchange Notes (and related guarantees) in exchange for
surrender of the Old Notes (and related guarantees). The
Trigger Date occurred on October 15, 1997.
If, (i) the Exchange Offer is not consummated within 180
days of the Trigger Date, (ii) in certain circumstances, certain
Holders of unregistered Exchange Notes so request or (iii) in the
case of any Holder that participates in the Exchange Offer, such
Holder does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of
such Holder as an affiliate of the Company or any Subsidiary
Guarantor within the meaning of the Securities Act), then in each
case the Company and each Subsidiary Guarantor will (x) promptly
deliver to the Holders and Trustee written notice thereof and (y)
at their sole expense, (A) as promptly as practicable, file a
shelf registration statement covering resales of the Notes (the
"Shelf Registration Statement"), (B) use their best efforts to
cause the Shelf Registration Statement to be declared effective
under the Securities Act and (C) use their best efforts to keep
effective the Shelf Registration Statement until the earlier of
two years after the Issue Date (or such earlier date as may be
authorized under Rule 144(k), as it may be amended from time to
time) or such time as all of the applicable Notes have been sold
thereunder or are otherwise eligible for sale under Rule 144
under the Securities Act. The Exchange Offer was not consummated
within 180 days of the Trigger Date. The Company has notified
the Holders and the Trustee that it is satisfying its obligations
pursuant to the foregoing requirement by filing this Exchange
Offer Registration Statement in lieu of a Shelf Registration
Statement. The Company and each Subsidiary Guarantor will, in
the event that a Shelf Registration Statement is filed, provide
to each Holder copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the
Shelf Registration Statement for the Notes has become effective
and take certain other actions as are required to permit
unrestricted resales of the Notes. A Holder that sells Notes
pursuant to the Shelf Registration Statement will be required to
be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities
Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification
rights and obligations). In addition, each holder of the Notes
will be required to deliver information to be used in connection
with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have its
Notes included in the Shelf Registration Statement and to benefit
from the provisions regarding liquidated damages set forth in the
following paragraph.
The Registration Rights Agreement provides that, in the
event that either (i) the Exchange Offer Registration Statement
is not filed with the Commission on or prior to the 60th calendar
day following the Trigger Date, (ii) the Exchange Offer
Registration Statement is not declared effective on or prior to
the 150th calendar day following the Trigger Date, or (iii) the
Exchange Offer is not consummated or the Shelf Registration
Statement is not declared effective on or prior to the date
required by the Registration Rights Agreement or the Shelf
Registration Statement ceases to be effective (each such event
referred to in clauses (i) through (iii), a "Registration
Default"), the Company will pay, as liquidated damages, cash
interest ("Additional Interest") to each Holder of the Notes
during the first 90 day period immediately following the
occurrence of such Registration Default in an amount equal to
0.50% per annum of the principal amount of such Notes, plus an
additional 0.50% per annum for each subsequent 90 day period
until the Exchange Offer Registration Statement is filed, the
Exchange Offer Registration Statement is declared effective, the
Exchange Offer is consummated or the Shelf Registration Statement
is declared effective or again becomes effective, as the case may
be, up to a maximum amount of Additional Interest of 2.00% per
annum. The Trigger Date occurred more than 60 calendar days prior
to the date (the "Filing Date") on which the Exchange Offer
Registration Statement was filed, which was May 8, 1998,
resulting in a Registration Default as of December 14, 1997. As
a result of this Registration Default, the interest rate on the
Old Notes was increased to 14% from the date one day after the
Registration Default. Effective March 14, 1998, the interest
rate was again increased to 14.5% for the portion of the
subsequent 90 day period during which the Exchange Offer
Registration Statement was not filed. These increases ended when
the Registration Statement was filed and the interest rate was
reduced to 13.5%. As the Exchange Offer Registration Statement
was not declared effective by May 13, 1998, the interest rate was
again increased to 14% the following day and increased again to
14.5% on August 13, 1998. Due to each of the foregoing
Registration Defaults, additional interest will be due on
November 1, 1998 of $4.40 per $1,000 outstanding principal amount
of the Old Notes. Holders of record of Exchange Notes on the
record date for the November 1, 1998 dividend payment will
receive such Additional Interest on November 1, 1998. The
interest rate will increase again to 15% on November 10, 1998 if
the Exchange Offer Registration Statement has not been declared
effective by that time. (These increases will end when the
Exchange Offer Registration Statement is declared effective and
the Exchange Offer is consummated.)
If for any reason a Holder fails to exchange its Old Notes
for Exchange Notes or any Old Notes remain outstanding, the
Company will promptly notify the Trustee and the Old Notes and
Exchange Notes will be deemed one class of security subject to
the provisions of the Indenture and entitled to participate in
all the security granted by the Company pursuant thereto and in
the Subsidiary Guarantees on a ratable basis.
The summary herein of certain provisions of the Registration
Rights Agreement does not purport to be complete and is subject
to, and is qualified in its entirety by, all the provisions of
the Registration Rights Agreement, a copy of which is available
upon request to the Company.
Change of Control
- -----------------
The Indenture provides that upon the occurrence of a Change
of Control, each Holder will have the right to require that the
Company purchase all or a portion of such Holder's Notes pursuant
to the offer described below (the "Change of Control Offer"), at
a price (the "Change of Control Purchase Price") equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if
any, thereon to the date of purchase.
Within 30 days following the date upon which the Change of
Control occurred, the Company must send, by first class mail, a
notice to each Holder, with a copy to the Trustee, which notice
shall govern the terms of the Change of Control Offer. Such
notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the
date such notice is mailed, other than as may be required by law
(the "Change of Control Payment Date"). A Change of Control
Offer shall remain open for a period of 20 Business Days or such
longer period as may be required by law. Holders electing to
have a Note purchased pursuant to a Change of Control Offer will
be required to surrender the Note, with the form entitled "Option
of Holder to Elect Purchase" on the reverse of the Note
completed, to the paying agent for the Notes at the address
specified in the notice prior to the close of business on the
third Business Day prior to the Change of Control Payment Date.
The Company shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the
Change of Control Offer at the Change of Control Purchase Price,
at the same time and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
If a Change of Control Offer is made, there can be no
assurance that the Company will have available funds sufficient
to pay the Change of Control Purchase Price for all the Notes
that might be delivered by Holders seeking to accept the Change
of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to such a Change of Control
Offer, the Company expects that it would seek third party
financing to the extent it does not have available funds to meet
its purchase obligations. However, there can be no assurance
that the Company will be able to obtain such financing.
Neither the Board of Directors of the Company nor the
Trustee may waive the covenant relating to the Company's
obligation to make a Change of Control Offer. Restrictions in the
Indenture described herein on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to
make Asset Sales may also make more difficult or discourage a
takeover of the Company, whether favored or opposed by the
management of the Company. Consummation of any such transaction
in certain circumstances may require repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such
repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of the Company
by the management of the Company. While such restrictions cover
a wide variety of arrangements which have traditionally been used
to effect highly leveraged transactions, the Indenture may not
afford the Holders of Notes protection in all circumstances from
the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations
are applicable in connection with the purchase of Notes pursuant
to a Change of Control Offer. To the extent that the provisions
of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply
with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
Certain Covenants
- -----------------
The following sets forth a summary description of certain of
the covenants contained in the Indenture. Except as explicitly
set forth to the contrary below, all references to the Company in
this section shall mean XCL Ltd. only and shall not include any
Unrestricted Subsidiary of XCL Ltd.
Limitation on Incurrence of Additional Indebtedness. Other
than Permitted Indebtedness, the Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly
or indirectly, create, incur, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise
become responsible for payment of (collectively, "incur") any
Indebtedness; provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time of or
as a consequence of the incurrence of any such Indebtedness, the
Company and the Restricted Subsidiaries (or any of them) may
incur Indebtedness (including, without limitation, Acquired
Indebtedness), in each case, if on the date of the incurrence of
such Indebtedness, after giving pro forma effect to the
incurrence thereof and the receipt and application of the
proceeds therefrom, both (a) the Company's Consolidated EBITDA
Coverage Ratio would have been greater than 2.5 to 1.0 and (b)
the Company's Adjusted Consolidated Net Tangible Assets are equal
to or greater than 150% of the aggregate consolidated
Indebtedness of the Company and its Restricted Subsidiaries. In
addition, the Company will not cause or permit any of its
Restricted Subsidiaries to incur any Indebtedness, other than
Permitted Indebtedness.
For purposes of determining any particular amount of
Indebtedness under this covenant, guarantees of Indebtedness
otherwise included in the determination of such amount shall not
also be included.
Indebtedness of a Person existing at the time such Person
becomes a Restricted Subsidiary (whether by merger,
consolidation, acquisition of Capital Stock or otherwise) or is
merged with or into the Company or any Restricted Subsidiary or
which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is
assumed by the acquiring Person) shall be deemed incurred at the
time the Person becomes a Restricted Subsidiary or at the time of
the asset acquisition, as the case may be.
The Company will not, and will not permit any Subsidiary
Guarantor to, incur any Indebtedness which by its terms (or by
the terms of any agreement governing such Indebtedness) is
subordinated in right of payment to any other Indebtedness of the
Company or such Subsidiary Guarantor unless such Indebtedness is
also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly subordinate in right of payment
to the Notes or the Subsidiary Guarantee of such Subsidiary
Guarantor, as the case may be, pursuant to subordination
provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most
favorable to the holders of any other Indebtedness of the Company
or such Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments. The Company will not,
and will not cause or permit any of its Restricted Subsidiaries
to, directly or indirectly, (a) declare or pay any dividend or
make any distribution (other than dividends or distributions
payable solely in Qualified Capital Stock of the Company) on or
in respect of shares of the Company's Capital Stock to holders of
such Capital Stock, (b) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or any
warrants, rights or options to purchase or acquire shares of any
class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire
or retire for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company or a Subsidiary Guarantor that is
subordinate or junior in right of payment to the Notes or such
Subsidiary Guarantor's Subsidiary Guarantee, as the case may be,
or (d) make any Investment (other than a Permitted Investment)
(each of the foregoing actions set forth in clauses (a), (b), (c)
and (d) being referred to as a "Restricted Payment"), if at the
time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have
occurred and be continuing or (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with "-- Limitation on
Incurrence of Additional Indebtedness" above, or (iii) the
aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company, but shall
not include the value of the Company's interest in the lube oil
joint venture contemplated to be transferred to an Unrestricted
Subsidiary upon approval of the Chinese government) shall exceed
the sum of: (A) 50% of the cumulative Consolidated Net Income (or
if cumulative Consolidated Net Income shall be a loss, minus 100%
of such loss) of the Company earned subsequent to the Issue Date
and on or prior to the last date of the Company's fiscal quarter
immediately preceding such Restricted Payment (the "Reference
Date") (treating such period as a single accounting period); PLUS
(B) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Restricted Subsidiary of
the Company) from the issuance and sale subsequent to the Issue
Date and on or prior to the Reference Date of Qualified Capital
Stock of the Company; PLUS (C) without duplication of any amounts
included in clause (iii)(B) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company
subsequent to the Issue Date from a holder of the Company's
Capital Stock (excluding, in the case of clauses (iii) (B) and
(C), any net cash proceeds from an Equity Offering to the extent
used to redeem the Notes); PLUS (D) an amount equal to the net
reduction in Investments in Unrestricted Subsidiaries resulting
from dividends, interest payments, repayments of loans or
advances, or other transfers of cash, in each case to the Company
or to any Wholly Owned Restricted Subsidiary of the Company
subsequent to the Issue Date from Unrestricted Subsidiaries (but
without duplication of any such amount included in calculating
cumulative Consolidated Net Income of the Company), or from
designations of Unrestricted Subsidiaries as Restricted
Subsidiaries (in each case valued as provided in "-- Limitation
on Restricted and Unrestricted Subsidiaries" below) not to
exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary and which was treated
as a Restricted Payment under the Indenture; PLUS (E) without
duplication of the immediately preceding subclause (D), an amount
equal to the lesser of the cost or net cash proceeds received
upon the sale or other disposition of any Investment made after
the Issue Date which had been treated as a Restricted Payment
(but without duplication of any such amount included in
calculating cumulative Consolidated Net Income of the Company);
PLUS (F) $5 million.
Notwithstanding the foregoing, the provisions set forth in
the immediately preceding paragraph shall not prohibit: (1) the
payment of any dividend or redemption payment within 60 days
after the date of declaration of such dividend or the applicable
redemption if the dividend or redemption payment, as the case may
be, would have been permitted on the date of declaration; (2) the
redemption or other acquisition of any shares of Capital Stock of
the Company, either (A) solely in exchange for shares of
Qualified Capital Stock of the Company or warrants, rights or
options to purchase or acquire shares of Qualified Capital Stock
of the Company or (B) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a
Restricted Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company; (3) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of
any Indebtedness of the Company or Subsidiary Guarantor that is
subordinate or junior in right of payment to the Notes or such
Subsidiary Guarantor's Subsidiary Guarantee, as the case may be,
either (A) solely in exchange for shares of Qualified Capital
Stock of the Company, or (B) through the application of net
proceeds of a substantially concurrent sale for cash (other than
to a Restricted Subsidiary of the Company) of (I) shares of
Qualified Capital Stock of the Company or (II) Refinancing
Indebtedness; and (4) the initial designation of XCL-China, XCL-
China LubeOil Ltd., XCL-China Coal Methane Ltd., XCL-Texas, Ltd.,
XCL-Acquisitions, Inc., The Exploration Company of Louisiana,
Inc. and XCL-Land Ltd. as Unrestricted Subsidiaries under the
Indenture and the transfer of the Company's interest in the lube
oil joint venture to XCL-China LubeOil, Ltd., an Unrestricted
Subsidiary. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with
clause (iii) of the immediately preceding paragraph, amounts
expended pursuant to clauses (1), (2)(B), and 3(B)(I) above shall
be included in such calculation. Furthermore, the Company may
pay cash dividends in respect of its Preferred Stock in an amount
of up to $9,400,000 in any twelve-month period, commencing with
the twelve months beginning on the third anniversary of the Issue
Date, if such Restricted Payments comply with the provisions set
forth in the preceding paragraph, but for such purposes losses
incurred prior to the third anniversary of the Issue Date shall
be disregarded in determining the amount referred to in clause
(A) of such paragraph.
Limitation on Asset Sales. The Company will not, and will
not cause or permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless (a) the Company or the applicable
Restricted Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined
in good faith by the Company's Board of Directors or, in the case
of any Asset Sale involving total cash consideration of less than
$2,000,000, senior management of the Company); (b)(i) at least
70% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale
shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition and (ii) at least 15% of such
consideration received if in a form other than cash or Cash
Equivalents is converted into or exchanged for cash or Cash
Equivalents within 120 days of such disposition; and (c) upon the
consummation of an Asset Sale, the Company shall apply, or cause
such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 365 days of receipt thereof
either (i) to repay or prepay Indebtedness (other than
Indebtedness that is subordinate or junior in right of payment to
the Notes), provided, in each case, that any related loan
commitment is thereby permanently reduced by the amount of the
Indebtedness so paid, (ii) to repay or prepay any Indebtedness of
the Company that is secured by a Lien permitted to be incurred
pursuant to "-- Limitation on Liens" below, (iii) to make an
investment in properties or assets that replace the properties or
assets that were the subject of such Asset Sale or in properties
or assets that will be used in the Crude Oil and Natural Gas
Business of the Company and its Restricted Subsidiaries as
existing on the Issue Date ("Replacement Assets"), (iv) to an
investment in Crude Oil and Natural Gas Related Assets or (v) a
combination of prepayment and investment permitted by the
foregoing clauses (c)(i) through (c)(iv). On the 366th day after
an Asset Sale or such earlier date, if any, following the
disbursement of all the Collateral subject to the Principal
Account (as defined in the Disbursement Agreement) in accordance
with the Disbursement Agreement as the Board of Directors of the
Company determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (c)(i) through (c)(v) of
the next preceding sentence (each a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have
been received by the Company or such Restricted Subsidiary but
which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (c)(i) through (c)(v) of the
next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary, as
the case may be, to make an offer to purchase (a "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not
less than 30 nor more than 45 days following the applicable Net
Proceeds Offer Trigger Date, from all Holders on a pro rata
basis, that principal amount of Notes purchasable with the Net
Proceeds Offer Amount at a price equal to 100% of the principal
amount of the Notes to be purchased, plus accrued and unpaid
interest, if any, thereon to the date of purchase; provided,
however, that if at any time any non-cash consideration received
by the Company or any Restricted Subsidiary, as the case may be,
in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash or Cash Equivalents (other than
interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash
Proceeds thereof shall be applied in accordance with this
covenant. The Company may defer the Net Proceeds Offer until
there is an aggregate unutilized Net Proceeds Offer Amount equal
to or in excess of $7,500,000 resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $7,500,000, shall be
applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not
all) of the properties and assets of the Company and its
Restricted Subsidiaries as an entirety to a Person in a
transaction permitted under "-- Merger, Consolidation and Sale of
Assets," such Person shall be deemed to have sold the properties
and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with
the provisions of this covenant with respect to such deemed sale
as if it were an Asset Sale. In addition, the fair market value
of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs,
the Company and its Restricted Subsidiaries will be permitted to
consummate an Asset Sale without complying with such paragraphs
to the extent (a) the consideration for such Asset Sale
constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value;
provided, however, that any consideration not constituting
Replacement Assets and Crude Oil and Natural Gas Related Assets
received by the Company or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the
provisions of the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the
record Holders as shown on the register of Holders within 30 days
following the Net Proceeds Offer Trigger Date, with a copy to the
Trustee, and shall comply with the procedures set forth in the
Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent
Holders properly tender Notes with an aggregate principal amount
exceeding the Net Proceeds Offer Amount, Notes of tendering
Holders will be purchased on a pro rata basis (based on principal
amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 Business Days or such longer period as may be
required by law.
The Company's ability to repurchase Notes in a Net Proceeds
Offer may be prohibited or otherwise limited by the terms of any
then existing borrowing arrangements and by the Company's
financial resources.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations
are applicable in connection with the repurchase of Notes
pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Indenture, the Company shall
comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock;
(b) make loans or advances, or to pay any Indebtedness or other
obligation owed, to the Company or any other Restricted
Subsidiary; (c) guarantee any Indebtedness or any other
obligation of the Company or any Restricted Subsidiary; or (d)
transfer any of its property or assets to the Company or any
other Restricted Subsidiary (each such encumbrance or
restriction, a "Payment Restriction"), except for such
encumbrances or restrictions existing under or by reason of: (i)
applicable law; (ii) the Indenture; (iii) a credit facility
described in clause (b) of the definition of "Permitted
Indebtedness"; (iv) customary non-assignment provisions of any
contract or any lease governing a leasehold interest of any
Restricted Subsidiary; (v) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable
to such Restricted Subsidiary, or the properties or assets of
such Restricted Subsidiary, other than the Person or the
properties or assets of the Person so acquired; (vi) agreements
existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (vii) customary
restrictions with respect to a Restricted Subsidiary of the
Company pursuant to an agreement that has been entered into for
the sale or disposition of Capital Stock or assets of such
Restricted Subsidiary to be consummated in accordance with the
terms of the Indenture solely in respect of the assets or Capital
Stock to be sold or disposed of; (viii) any instrument governing
a Permitted Lien, to the extent and only to the extent such
instrument restricts the transfer or other disposition of assets
subject to such Permitted Lien; or (ix) an agreement governing
Refinancing Indebtedness incurred in relation to the Indebtedness
issued, assumed or incurred pursuant to an agreement referred to
in clause (ii) or (vi) above; provided, however, that the
provisions relating to such encumbrance or restriction contained
in any such Refinancing Indebtedness are no less favorable to the
Holders in any material respect (as determined by the Board of
Directors of the Company in their reasonable and good faith
judgment) than the provisions relating to such encumbrance or
restriction contained in the applicable agreement referred to in
such clause (ii) or (vi).
Limitation on Capital Stock of Restricted Subsidiaries. The
Company will not cause or permit any of its Restricted
Subsidiaries to issue or sell Capital Stock (other than to the
Company or to another Wholly Owned Restricted Subsidiary) or
permit any Person (other than the Company or another Wholly Owned
Restricted Subsidiary) to own any Capital Stock of any Restricted
Subsidiary.
Limitation on Liens. Other than Permitted Liens, the
Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or permit or suffer to exist any Liens of any kind
against or upon any property or assets of the Company or any of
its Restricted Subsidiaries (whether owned on the Issue Date or
acquired after the Issue Date) or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits
therefrom unless (a) in the case of Liens securing Indebtedness
that is expressly subordinate or junior in right of payment to
the Notes or any Subsidiary Guarantee, the Notes or such
Subsidiary Guarantee, as the case may be, is secured by a Lien on
such property, assets or proceeds that is senior in priority to
such Liens at least to the same extent as the Notes or such
Subsidiary Guarantee, as the case may be, is senior in priority
to such Indebtedness and (b) in all other cases, the Notes and
the Subsidiary Guarantees are equally and ratably secured.
Merger, Consolidation and Sale of Assets. The Company will
not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or
permit any Restricted Subsidiary to sell, assign, transfer,
lease, convey or otherwise dispose of) all or substantially all
of the Company's properties and assets (determined on a
consolidated basis for the Company and its Restricted
Subsidiaries), whether as an entirety or substantially as an
entirety to any Person, unless: (a) either (i) the Company shall
be the surviving or continuing corporation or (ii) the Person (if
other than the Company), including, without limitation, a
Restricted Subsidiary, formed by such consolidation or into which
the Company is merged or the Person which acquires by sale,
assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and its Restricted
Subsidiaries substantially as an entirety (the "Surviving
Entity") (x) shall be a corporation organized and validly
existing under the laws of the United States or any state thereof
or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the
Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, premium, if any, and
interest on all of the Notes and the performance of every
covenant of the Notes, the Indenture, the Pledge Agreement and
the Registration Rights Agreement on the part of the Company to
be performed or observed; (b) immediately after giving effect to
such transaction and the assumption contemplated by clause
(a)(ii)(y) above (including giving effect to any Indebtedness
incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving
Entity, as the case may be, (i) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the
Company immediately prior to such transaction and (ii) shall be
able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to "-- Limitation on
Incurrence of Additional Indebtedness" above; (c) immediately
before and immediately after giving effect to such transaction
and the assumption contemplated by clause (a)(ii)(y) above
(including, without limitation, giving effect to any Indebtedness
incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and (d)
the Company or the Surviving Entity, as the case may be, shall
have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that such consolidation, merger,
sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture,
comply with the applicable provisions of the Indenture and that
all conditions precedent in the Indenture relating to such
transaction have been satisfied; provided, however, that such
counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company.
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series
of transactions) of all or substantially all of the properties or
assets of one or more Restricted Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties
and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the
Company.
Upon any consolidation, combination or merger or any
transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the
continuing corporation, the Surviving Entity shall succeed to,
and be substituted for, and may exercise every right and power
of, the Company under the Indenture and the Notes with the same
effect as if such Surviving Entity had been named as such.
Each Subsidiary Guarantor (other than any Subsidiary
Guarantor whose Subsidiary Guarantee is to be released in
accordance with the terms of the Subsidiary Guarantee and the
Indenture in connection with any transaction complying with the
provisions of the Indenture described under "Merger,
Consolidation and Sale of Assets") will not, and the Company will
not cause or permit any Subsidiary Guarantor to, consolidate with
or merge with or into, or sell, assign, transfer, lease, convey,
or otherwise dispose of all or substantially all of its
properties and assets, to any Person other than the Company or
another Subsidiary Guarantor unless: (a) the entity formed by or
surviving any such consolidation or merger (if other than the
Subsidiary Guarantor) or to which such disposition shall have
been made is a corporation organized and existing under the laws
of the United States or any state thereof or the District of
Columbia; (b) such entity assumes by execution of a supplemental
indenture all of the obligations of the Subsidiary Guarantor
under its Subsidiary Guarantee; (c) immediately after giving
effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving
effect to such transaction and the use of any net proceeds
therefrom on a pro forma basis, the Company could satisfy the
provisions of a clause (b) of the first paragraph of this
covenant. Any merger or consolidation of a Subsidiary Guarantor
with and into, or disposition of all or substantially all of its
properties and assets to, the Company (with the Company being the
surviving entity) or another Subsidiary Guarantor need only
comply with clause (d) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The
Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into,
amend or permit or suffer to exist any transaction or series of
related transactions (including, without limitation, the
purchase, sale, lease or exchange of any property, the
guaranteeing of any Indebtedness or the rendering of any service)
with, or for the benefit of, any of their respective Affiliates
(each an "Affiliate Transaction"), other than (i) Affiliate
Transactions permitted under paragraph (b) of this covenant and
(ii) Affiliate Transactions that are on terms that are fair and
reasonable to the Company or the applicable Restricted Subsidiary
and are no less favorable to the Company or the applicable
Restricted Subsidiary than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-
length basis from a Person that is not an Affiliate of the
Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of
$1,000,000 shall be approved by the Board of Directors of the
Company, such approval to be evidenced by a Board Resolution
stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate
Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market
value of more than $10,000,000, the Company shall, prior to the
consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to
the Company or the relevant Restricted Subsidiary, as the case
may be, from a financial point of view, from a nationally
recognized investment banking firm and file the same with the
Trustee.
(b) The restrictions set forth in clause (a) shall not
apply to (i) reimbursement of expenses incurred in the conduct of
the Company's or any Restricted Subsidiary's business by, and
reasonable fees and compensation paid to and indemnity provided
on behalf of, officers, directors, employees or consultants of
the Company or any Restricted Subsidiary as determined in good
faith by the Board of Directors or senior management of the
Company or such Restricted Subsidiary, as the case may be; (ii)
transactions exclusively between or among the Company and any of
its Restricted Subsidiaries or exclusively between or among such
Restricted Subsidiaries; provided, however, that such
transactions are not otherwise prohibited by the Indenture; and
(iii) Restricted Payments permitted by the Indenture.
Limitation on Restricted and Unrestricted Subsidiaries. The
Indenture provides that the Board of Directors may, if no Default
or Event of Default shall have occurred and be continuing or
would arise therefrom, designate an Unrestricted Subsidiary to be
a Restricted Subsidiary; provided, however, that (i) any such
designation shall be deemed to be an incurrence as of the date of
such designation by the Company and its Restricted Subsidiaries
of the Indebtedness (if any) of such designated Subsidiary for
purposes of "-- Limitation on Incurrence of Additional
Indebtedness" above, and (ii) unless such designated Subsidiary
shall not have any Indebtedness outstanding, other than
Indebtedness which would be Permitted Indebtedness, no such
designation shall be permitted if immediately after giving effect
to such designation and the incurrence of any such Indebtedness
the Company could not incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to "-- Limitation on
Incurrence of Additional Indebtedness" above. The Company has
designated XCL-China a Restricted Subsidiary effective the date
its Subsidiary Guarantee became effective.
The Board of Directors of the Company also may, if no
Default or Event of Default shall have occurred and be continuing
or would arise therefrom, designate any Restricted Subsidiary to
be an Unrestricted Subsidiary if (i) such designation is at that
time permitted under "-- Limitation on Restricted Payments" above
and (ii) immediately after giving effect to such designation, the
Company could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to "-- Limitation on Incurrence
of Additional Indebtedness" above. Any such designation by the
Board of Directors shall be evidenced to the Trustee by the
filing with the Trustee of a certified copy of the resolution of
the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied
with the foregoing conditions and setting forth in reasonable
detail the underlying calculations. In the event that any
Restricted Subsidiary is designated an Unrestricted Subsidiary in
accordance with this covenant, such Restricted Subsidiary's
Subsidiary Guarantee will be released.
The Indenture provides that for purposes of the covenant
described under "-- Limitation on Restricted Payments" above, (i)
an "Investment" shall be deemed to have been made at the time any
Restricted Subsidiary is designated as an Unrestricted Subsidiary
in an amount (proportionate to the Company's equity interest in
such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is
designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate amount of all Restricted Payments made as Investments
since the Issue Date shall exclude and be reduced by an amount
(proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary, not to exceed, in the case of any such
designation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the amount of Investments previously made by the
Company and its Restricted Subsidiaries in such Unrestricted
Subsidiary (in each case (i) and (ii) "net worth" to be
calculated based upon the fair market value of the net assets of
such Subsidiary as of any such date of designation); and (iii)
any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such
transfer.
The Indenture provides that notwithstanding the foregoing,
the Board of Directors may not designate any Subsidiary of the
Company to be an Unrestricted Subsidiary if, after such
designation, (a) the Company or any Restricted Subsidiary (i)
provides credit support for, or a guarantee of, any Indebtedness
of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (ii) is directly or
indirectly liable for any Indebtedness of such Subsidiary or (b)
such Subsidiary owns any Capital Stock of, or owns or holds any
Lien on any property of, any Restricted Subsidiary which is not a
Subsidiary of the Subsidiary to be so designated.
Notwithstanding any provisions of this covenant, all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted
Subsidiaries.
Additional Subsidiary Guarantees. If the Company or any of
its Restricted Subsidiaries transfers or causes to be
transferred, in one transaction or a series of related
transactions, any property to any Restricted Subsidiary that is
not a Subsidiary Guarantor, or if the Company or any of its
Restricted Subsidiaries shall organize, acquire or otherwise
invest in or hold an Investment in another Restricted Subsidiary
having total consolidated assets with a book value in excess of
$1,000,000 that is not a Subsidiary Guarantor, then such
transferee or acquired or other Restricted Subsidiary shall (a)
execute and deliver to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which
such Restricted Subsidiary shall unconditionally guarantee all of
the Company's obligations under the Notes and the Indenture on
the terms set forth in the Indenture and (b) deliver to the
Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary.
Thereafter, such Restricted Subsidiary shall be a Subsidiary
Guarantor for all purposes of the Indenture.
Limitation on Conduct of Business. The Company will not,
and will not permit any of its Restricted Subsidiaries to, engage
in the conduct of any business other than the Crude Oil and
Natural Gas Business and the Lube Oil Business.
Reports to Holders. The Company will deliver to the Trustee
within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the
Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. Notwithstanding that
the Company may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, to the extent permitted, and provide the
Trustee and Holders with such annual reports and such
information, documents and other reports specified in Section 13
of the Exchange Act. The Company will also comply with the other
provisions of Section 314(a) of the TIA.
Events of Default
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The following events will be defined in the Indenture as
"Events of Default":
(a) the failure to pay interest (including any
Additional Interest (as defined herein under "Exchange Offer
and Registration Rights")) on any Notes when the same
becomes due and payable and the default continues for a
period of 30 days;
(b) the failure to pay the principal on any Notes,
when such principal becomes due and payable, at maturity,
upon redemption or otherwise (including the failure to make
a payment to purchase Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer);
(c) a default in the performance or breach of the
provisions of the "Merger, Consolidation and Sale of Assets"
covenant, failure to make or consummate a Change of Control
Offer in accordance with the provisions of the "Change of
Control" covenant or the failure to make or consummate a Net
Proceeds Offer in accordance with the provisions of the
"Limitation on Asset Sales" covenant;
(d) a default in the observance or performance of
any other covenant or agreement contained in the Indenture
which default continues for a period of 30 days after the
Company receives written notice specifying the default (and
demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal
amount of the Notes;
(e) a default in the observance or performance of
any covenant or agreement contained in the Pledge Agreement
which default continues for a period of 30 days after the
Company receives written notice specifying the default (and
demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal
amount of the Notes;
(f) a default under any mortgage, indenture or
instrument under which there may be issued or by which there
may be secured or evidenced any Indebtedness of the Company
or of any Restricted Subsidiary (or the payment of which is
guaranteed by the Company or any Restricted Subsidiary),
whether such Indebtedness now exists or is created which
default (i) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after any
applicable grace period provided in such Indebtedness (a
"payment default") or (ii) results in the acceleration of
such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness,
together with the principal amount of any other such
Indebtedness under which there has been a payment default or
the maturity of which has been so accelerated, aggregates at
least $5,000,000;
(g) the Pledge Agreement shall, at any time, cease
to be in full force and effect or shall be declared null and
void, or the validity or enforceability thereof shall be
contested by the Company or any of its Affiliates, or any of
the Liens intended to be created by the Pledge Agreement,
shall cease to be or shall not be a valid and perfected Lien
having the priority contemplated thereby;
(h) one or more judgments in an aggregate amount in
excess of $5,000,000 (unless covered by insurance by a
reputable insurer as to which the insurer has acknowledged
coverage) shall have been rendered against the Company or
any of its Restricted Subsidiaries and such judgment or
judgments remain undischarged, unvacated, unpaid or unstayed
for a period of 60 days after such judgment or judgments
become final and non-appealable;
(i) certain events of bankruptcy affecting the
Company or any of its Subsidiaries; or
(j) any of the Subsidiary Guarantees cease to be in
full force and effect or any of the Subsidiary Guarantees
are declared to be null and void or invalid and
unenforceable or any of the Subsidiary Guarantors denies or
disaffirms its liability under its Subsidiary Guarantee
(other than by reason of release of a Subsidiary Guarantor
in accordance with the terms of the Indenture).
The Indenture provides that, if an Event of Default (other
than an Event of Default specified in clause (i) above) shall
occur and be continuing, the Trustee or the Holders of at least
25% in principal amount of outstanding Notes may declare the
principal of, premium, if any, and accrued and unpaid interest on
all the Notes to be due and payable by notice in writing to the
Company and the Trustee specifying the Event of Default and that
it is a "notice of acceleration," and the same shall become
immediately due and payable. If an Event of Default specified in
clause (i) above occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid
interest on all of the outstanding Notes shall ipso facto become
and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration
of acceleration with respect to the Notes as described in the
preceding paragraph, the Holders of a majority in principal
amount of the Notes may rescind and cancel such declaration and
its consequences (a) if the rescission would not conflict with
any judgment or decree, (b) if all existing Events of Default
have been cured or waived except nonpayment of principal or
interest that has become due solely because of such acceleration,
(c) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (d) if the Company
has paid the Trustee its reasonable compensation and reimbursed
the Trustee for its expenses, disbursements and advances and (e)
in the event of the cure or waiver of an Event of Default of the
type described in clause (i) of the description of Events of
Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default
has been cured or waived; provided, however, that such counsel
may rely, as to matters of fact, on a certificate or certificates
of officers of the Company. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
The Indenture provides that, at any time prior to the
declaration of acceleration of the Notes, the Holders of a
majority in principal amount of Notes may waive any existing
Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of
or interest on any Notes.
The Indenture provides that Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the
Indenture and under the TIA. During the existence of an Event of
Default, the Trustee is required to exercise such rights and
powers vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as prudent man would
exercise or use under the circumstances in the conduct of his own
affairs. Subject to the provisions of the Indenture relating to
the duties of the Trustee, whether or not an Event of Default
shall occur and be continuing, the Trustee is under no obligation
to exercise any of its rights or powers under the Indenture at
the request, order or direction of any of the Holders, unless
such Holders have offered to the Trustee reasonable indemnity.
Subject to all provisions of the Indenture and applicable law,
the Holders of a majority in principal amount of the then
outstanding Notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an
officers' certificate to the Trustee promptly upon any such
officer obtaining knowledge of any Default or Event of Default
(provided that such officers shall provide such certification at
least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
- ----------------------------------------
The Company may, at its option and at any time, elect to
have its obligations and the corresponding obligations of the
Subsidiary Guarantors discharged with respect to the outstanding
Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes, and satisfied
all of its obligations with respect to the Notes, except for (a)
the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when
such payments are due, (b) the Company's obligations with respect
to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights,
powers, trust, duties and immunities of the Trustee and the
Company's obligations in connection therewith and (d) the Legal
Defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations
of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not
constitute a Default or Event of Default with respect to the
Notes. In the event Covenant Defeasance occurs, certain events
(other than non-payment, bankruptcy, receivership, reorganization
and insolvency events) described under "-- Events of Default"
will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance, (a) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders cash in United
States dollars, non-callable United States government
obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium,
if any, and interest on the Notes on the stated date for payment
thereof or on the applicable redemption date, as the case may be;
(b) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (i)
the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or (ii) since the date of
the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders
will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not
occurred; (d) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after
the date of deposit; (e) such Legal Defeasance shall not result
in a breach or violation of, or constitute a default under the
Indenture or any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound; (f) the Company
shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; (g) the
Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have
been complied with; provided, however, that such counsel may
rely, as to matters of fact, on a certificate or certificates of
officers of the Company; and (h) the Company shall have delivered
to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights
generally; provided, however, that such counsel may rely, as to
matters of fact, on a certificate or certificates of officers of
the Company.
Satisfaction and Discharge
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The Indenture will be discharged and will cease to be of
further effect (except as to surviving rights of registration of
transfer or exchange of the Notes, as expressly provided for in
the Indenture) as to all outstanding Notes when (a) either (i)
all the Notes, theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid
and Notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation or (ii) all
Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on
the Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on
the Notes to the date of deposit together with irrevocable
instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the
case may be; (b) the Company has paid all other sums payable
under the Indenture by the Company; and (c) the Company has
delivered to the Trustee an officers' certificate and an opinion
of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the
Indenture have been complied with; provided, however, that such
counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company.
Modification of the Indenture
- -----------------------------
From time to time, the Company and the Trustee, without the
consent of the Holders, may amend or modify the Indenture for
certain specified purposes, including curing ambiguities, defects
or inconsistencies, to comply with any requirements of the
Commission in order to effect or maintain the qualification of
the Indenture under the TIA or to make any change that would
provide any additional benefit or rights to the Holders or that
does not adversely affect the rights of any Holder. In
formulating its opinion on such matters, the Trustee will be
entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel,
such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company. The provisions of the
Indenture respecting a Mandatory Redemption may be amended or
modified with the consent of the Holders of a majority in
principal amount of the then outstanding Notes. Other
modifications and amendments of the Indenture may be made with
the consent of the Holders of two-thirds in principal amount of
the then outstanding Notes, except that, without the consent of
each Holder affected thereby, no amendment may: (a) reduce the
amount of Notes whose Holders must consent to an amendment; (b)
reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on
any Notes; (c) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the
date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price
therefor; (d) make any Notes payable in money other than that
stated in the Notes; (e) make any change in provisions of the
Indenture protecting the right of each Holder to receive payment
of principal of and interest on such Note on or after the due
date thereof or to bring suit to enforce such payment, or
permitting Holders of a majority in principal amount of Notes to
waive Defaults or Events of Default; (f) amend, change or modify
in any material respect the obligation of the Company to make and
consummate a Change of Control Offer in the event of a Change of
Control or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto; (g) modify or
change any provision of the Indenture or the Pledge Agreement or
the related definitions affecting ranking of the Notes or any
Subsidiary Guarantee or the security for the Notes in a manner
which adversely affects the Holders; or (h) release any
Subsidiary Guarantor from any of its obligations under its
Subsidiary Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
Governing Law
- -------------
The Indenture provides that the Indenture, the Notes, the
Subsidiary Guarantees and the Pledge Agreement will be governed
by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
The Trustee
- ------------
The Trustee is State Street Bank and Trust Company,
successor to Fleet National Bank, 225 Asylum Street, Hartford,
Connecticut 06103, telephone number (860) 986-9344. The
Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Indenture. During the
existence of an Event of Default, the Trustee will exercise such
rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own
affairs.
The Indenture and the provisions of the TIA incorporated
therein contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payments of
claims in certain cases or to realize on certain property
received in respect of any such claim as security of otherwise.
Subject to the TIA, the Trustee will be permitted to engage in
other transactions; provided, however, that if the Trustee
acquires any conflicting interest as described in the TIA, it
must eliminate such conflict or resign.
No Personal Liability of Stockholders, Officers or Directors
- ------------------------------------------------------------
No past, present or future stockholder, officer, or director
of the Company or any Subsidiary shall have any personal
liability in respect of the obligations of the Company or such
Subsidiary under the Indenture, the Notes or the Pledge Agreement
by reason of his or its status as such stockholder, officer, or
director.
Certain Definitions
- -------------------
Set forth below is a summary of certain of the defined terms
used in the Indenture. Reference is made to the Indenture for
the full definition of all such terms, as well as any other terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or
any of its Subsidiaries (i) existing at the time such Person
becomes a Restricted Subsidiary or at the time it merges or
consolidates with the Company or any of its Restricted
Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of
assets from such Person, in each case not incurred in connection
with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, merger or
consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without
duplication), as of the date of determination, (a) the sum of (i)
discounted future net revenues from proved oil and gas reserves
of the Company and its Restricted Subsidiaries, calculated in
accordance with Commission guidelines (before any state or
federal income tax), as estimated by a nationally recognized firm
of independent petroleum engineers in a reserve report prepared
as of the end of the Company's most recently completed fiscal
year, as increased by, as of the date of determination, the
estimated discounted future net revenues from (A) estimated
proved oil and gas reserves acquired since the date of such year-
end reserve report, and (B) estimated oil and gas reserves
attributable to upward revisions of estimates of proved oil and
gas reserves since the date of such year-end reserve report due
to exploration, development or exploitation activities, in each
case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report),
and decreased by, as of the date of determination, the estimated
discounted future net revenues from (C) estimated proved oil and
gas reserves produced or disposed of since the date of such year-
end reserve report and (D) estimated oil and gas reserves
attributable to downward revisions of estimates of proved oil and
gas reserves since the date of such year-end reserve report due
to changes in geological conditions or other factors which would,
in accordance with standard industry practice, cause such
revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the case of each of
the determinations made pursuant to clauses (A) through (D), such
increases and decreases shall be as estimated by the Company's
petroleum engineers, unless in the event that there is a Material
Change as a result of such acquisitions, dispositions or
revisions, then the discounted future net revenues utilized for
purposes of this clause (a)(i) shall be confirmed in writing, by
a nationally recognized firm of independent petroleum engineers,
plus (ii) the capitalized costs that are attributable to oil and
gas properties of the Company and its Restricted Subsidiaries to
which no proved oil and gas reserves are attributable, based on
the Company's books and records as of a date no earlier than the
date of the Company's latest annual or quarterly financial
statements, plus (iii) the Net Working Capital on a date no
earlier than the date of the Company's latest consolidated annual
or quarterly financial statements, plus (iv) with respect to each
other tangible asset of the Company or its Restricted
Subsidiaries specifically including, but not to the exclusion of
any other qualifying tangible assets, the Company's or its
Restricted Subsidiaries' oil and gas producing facilities and
unproved oil and gas properties (less any remaining deferred
income taxes which have been allocated to such oil and gas
producing facilities in connection with the acquisition thereof),
land, equipment, leasehold improvements, investments carried on
the equity method, restricted cash and carrying value of
marketable securities, the greater of (A) the net book value of
such other tangible asset on a date no earlier than the date of
the Company's latest consolidated annual or quarterly financial
statements or (B) the appraised value, as estimated by an
Independent Advisor, of such other tangible assets of the Company
and its Restricted Subsidiaries, as of a date no earlier than the
date of the Company's latest audited financial statements, minus
(b) the sum of (i) minority interests, (ii) any gas balancing
liabilities of the Company and its Restricted Subsidiaries
reflected in the Company's latest audited financial statements,
(iii) to the extent included in (a)(i) above, the discounted
future net revenues, calculated in accordance with Commission
guidelines (utilizing the prices utilized in the Company's year-
end reserve report), attributable to reserves which are required
to be delivered to third parties to fully satisfy the obligations
of the Company and its Restricted Subsidiaries with respect to
Volumetric Production Payments on the schedules specified with
respect thereto and (iv) the discounted future net revenues,
calculated in accordance with Commission guidelines, attributable
to reserves subject to Dollar-Denominated Production Payments
which, based on the estimates of production and price assumptions
included in determining the discounted future net revenues
specified in (a)(i) above, would be necessary to fully satisfy
the payment obligations of the Company and its Restricted
Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto. If the
Company changes its method of accounting from the full cost
method to the successful efforts method or a similar method of
accounting, "Adjusted Consolidated Net Tangible Assets" will
continue to be calculated as if the Company was still using the
full cost method of accounting. In addition to, but without
duplication of, the foregoing, for purposes of this definition,
"Adjusted Consolidated Net Tangible Assets" shall be calculated
after giving effect, on a pro forma basis, to (1) any Investment
not prohibited by the Indenture, to and including the date of the
transaction giving rise to the need to calculate Adjusted
Consolidated Net Tangible Assets (the "Assets Transaction Date"),
in any other Person that, as a result of such Investment, becomes
a Restricted Subsidiary of the Company, (2) the acquisition, to
and including the Assets Transaction Date (by merger,
consolidation or purchase of stock or assets), of any business or
assets, including, without limitation, Permitted Industry
Investments, and (3) any sales or other dispositions of assets
permitted by the Indenture (other than sales of Hydrocarbons or
other mineral products in the ordinary course of business)
occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a)
any other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common
control with, such specified Person and (b) any Related Person of
such Person. The term "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of
the foregoing.
"Affiliate Transaction" has the meaning set forth under
"Certain Covenants -- Limitation on Transactions with
Affiliates."
"Asset Acquisition" means (a) an Investment by the Company
or any Restricted Subsidiary in any other Person pursuant to
which such Person shall become a Restricted Subsidiary, or shall
be merged with or into the Company or any Restricted Subsidiary,
or (b) the acquisition by the Company or any Restricted
Subsidiary of the properties and assets of any Person (other than
a Restricted Subsidiary) which constitute all or substantially
all of the properties and assets of such Person or comprises any
division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary
course of business.
"Asset Sale" means any direct or indirect sale, issuance,
conveyance, transfer, exchange, lease (other than operating
leases entered into in the ordinary course of business),
assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly
Owned Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary; or (b) any other property or assets
(including any interests therein) of the Company or any
Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction; provided, however,
that Asset Sales shall not include (i) the sale, lease,
conveyance, disposition or other transfer of all or substantially
all of the properties and assets of the Company in a transaction
which is made in compliance with the provisions of "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets", (ii) any
Investment in an Unrestricted Subsidiary which is made in
compliance with the provisions of "-- Certain Covenants --
Limitation on Restricted Payments" above, (iii) disposals or
replacements of obsolete equipment in the ordinary course of
business, (iv) the sale, lease, conveyance, disposition or other
transfer (each, a "Transfer") by the Company or any Restricted
Subsidiary of assets or property to the Company or one or more
Wholly Owned Restricted Subsidiaries, (v) any disposition of
Hydrocarbons or other mineral products for value in the ordinary
course of business, (vi) the Transfer of the Company's interests
in the Lutcher Moore Tract and the Cox Field, and (vii) the
Transfer by the Company or any Restricted Subsidiary of other
assets or property in the ordinary course of business; provided,
however, that the aggregate amount (valued at the fair market
value of such assets or property at the time of such Transfer) of
all such assets and property Transferred since the Issue Date
pursuant to this clause (vii) shall not exceed $1,000,000 in any
one year.
"Board of Directors" means, as to any Person, the board of
directors of such Person or any duly authorized committee
thereof.
"Board Resolution" means, with respect to any Person, a copy
of a resolution certified by the Secretary or Assistant Secretary
of such Person to have been duly adopted by the Board of
Directors of such Person and to be in full force and effect on
the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday, Sunday
or any other day on which banking institutions in the Cities of
New York, New York, Hartford, Connecticut, or Boston,
Massachusetts are required or authorized by law or other
governmental action to be closed.
"Capitalized Lease Obligation" means, as to any Person, the
discounted present value of the rental obligations of such Person
under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required
to be classified and accounted for as a capital lease obligation
at such date, determined in accordance with GAAP.
"Capital Stock" means (a) with respect to any Person that is
a corporation, any and all shares, interests, participations or
other equivalents (however designated and whether or not voting)
of capital stock, including each class of Common Stock and
Preferred Stock of such Person and including any warrants,
options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing and (b) with respect to any
Person that is not a corporation, any and all partnership or
other equity interests of such Person.
"Cash Equivalents" means (a) marketable direct obligations
issued by, or unconditionally guaranteed by, the United States
Government or issued by any agency thereof and backed by the full
faith and credit of the United States, in each case maturing
within six months from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state
or any public instrumentality thereof maturing within six months
from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable
from either Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") or Moody's Investors Service,
Inc. ("Moody's"); (c) commercial paper maturing no more than one
year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least
P-1 from Moody's; (d) certificates of deposit or bankers'
acceptances maturing within one year from the date of acquisition
thereof issued by any bank organized under the laws of the United
States of America or any state thereof or the District of
Columbia or any United States branch of a foreign bank having at
the date of acquisition thereof combined capital and surplus of
not less than $250,000,000; (e) repurchase obligations with a
term of not more than seven days for underlying securities of the
types described in clause (a) above entered into with any bank
meeting the qualifications specified in clause (d) above; (f)
money market mutual or similar funds having assets in excess of
$100,000,000 and (g) investments in money market funds registered
under the Investment Company Act of 1940, as amended,
substantially all of whose assets are limited to United States
government obligations and United States Agency obligations.
"Change of Control" means the occurrence of one or more of
the following events: (a) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions)
of all or substantially all of the properties and assets of the
Company (determined on a consolidated basis for the Company and
its Restricted Subsidiaries), whether as an entirety or
substantially as an entirety to any Person or group of related
Persons for purposes of Section 13(d) of the Exchange Act (a
"Group") (whether or not otherwise in compliance with the
provisions of the Indenture); (b) the approval by the holders of
Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not
otherwise in compliance with the provisions of the Indenture);
(c) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing
more than 35% of the aggregate ordinary voting power represented
by the issued and outstanding Capital Stock of the Company; or
(d) the replacement of a majority of the Board of Directors of
the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the
beginning of such period with directors whose replacement shall
not have been approved (by recommendation, nomination or
election, as the case may be) by a vote of at least a majority of
the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning
of such period or whose election as a member of such Board of
Directors was previously so approved. The term "all or
substantially all" is not defined by statute under New York law.
New York courts have held that a sale that deprives the
corporation of accomplishing the purposes or objects for which it
was incorporated constitutes a sale of all or substantially all
of the assets and have held that, among other things, where a
company retains valuable property there may not be a sale of all
or substantially all the assets.
"Change of Control Offer" has the meaning set forth under "-
- - Change of Control."
"Change of Control Payment Date" has the meaning set forth
under "-- Change of Control."
"Change of Control Purchase Price" has the meaning set forth
under " -- Change of Control."
"Commission" means the Securities and Exchange Commission.
"Common Stock" of any Person means any and all shares,
interests or other participations in, and other equivalents
(however designated and whether voting or non-voting) of such
Person's common stock, whether outstanding on the Issue Date or
issued after the Issue Date, and includes, without limitation,
all series and classes of such common stock.
"Company" means XCL Ltd., a Delaware corporation, until a
successor replaces it in accordance with the provisions of the
Indenture and thereafter means such successor.
"Company Properties" means all properties and assets, and
equity, partnership or other ownership interests therein, that
are related or incidental to, or used or useful in connection
with, the conduct or operation of any business activities of the
Company or its Subsidiaries, which business activities are not
prohibited by the terms of the Indenture.
"Consolidated EBITDA" means, for any period, the sum
(without duplication) of (a) Consolidated Net Income and (b) to
the extent Consolidated Net Income has been reduced thereby, (i)
all income taxes of the Company and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other
than income taxes attributable to extraordinary, unusual or
nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (ii)
Consolidated Interest Expense, (iii) the amount of any Preferred
Stock dividends paid by the Company and its Restricted
Subsidiaries and (iv) Consolidated Non-cash Charges, less any non-
cash items increasing Consolidated Net Income for such period,
all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to
the Company, the ratio of (a) Consolidated EBITDA of the Company
during the four full fiscal quarters for which financial
information in respect thereof is available (the "Four Quarter
Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage
Ratio (the "Transaction Date") to (b) Consolidated Fixed Charges
of the Company for the Four Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without
duplication) on a pro forma basis for the period of such
calculation to (a) the incurrence or repayment of any
Indebtedness of the Company or any of its Restricted Subsidiaries
(and the application of the proceeds thereof), giving rise to the
need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof),
other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant
to working capital facilities, occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if
such incurrence or repayment, as the case may be (and the
application of the proceeds thereof), occurred on the first day
of the Four Quarter Period and (b) any Asset Sales or Asset
Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a
result of the Company or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise
being liable for Acquired Indebtedness, and also including,
without limitation, any Consolidated EBITDA attributable to the
properties or assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such Asset Sale or Asset
Acquisition (including the incurrence, assumption or liability
for any such Acquired Indebtedness) occurred on the first day of
the Four Quarter Period. If the Company or any of its Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or
the Restricted Subsidiary, as the case may be, had directly
incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator)
of this "Consolidated EBITDA Coverage Ratio," (i) interest on
outstanding Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (ii) if interest on any
Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (iii) notwithstanding clauses (i) and
(ii) above, interest on Indebtedness determined on a fluctuating
basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue
at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to the
Company for any period, the sum, without duplication, of (a)
Consolidated Interest Expense (including any premium or penalty
paid in connection with redeeming or retiring Indebtedness of the
Company and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such
Indebtedness), PLUS (b) the product of (i) the amount of all
dividend payments on any series of Preferred Stock of the Company
(other than dividends paid in Qualified Capital Stock) paid,
accrued or scheduled to be paid or accrued during such period
times (ii) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of the
Company, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the
Company for any period, the sum of, without duplication: (a) the
aggregate of the interest expense of the Company and its
Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii)
the net costs under Interest Swap Obligations, (iii) all
capitalized interest and (iv) the interest portion of any
deferred payment obligation; and (b) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to
be paid or accrued by the Company and its Restricted Subsidiaries
during such period, as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company
for any period, the aggregate net income (or loss) of the Company
and its Restricted Subsidiaries for such period on a consolidated
basis, determined in accordance with GAAP; provided, however,
that there shall be excluded therefrom (a) after-tax gains from
Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring
gains, (c) the net income of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary or is merged or consolidated with the
Company or any Restricted Subsidiary, (d) the net income (but not
loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by charter,
contract, operation of law or otherwise, (e) the net income of
any Person in which the Company has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or
distributions actually paid to the Company or to a Restricted
Subsidiary by such Person, (f) income or loss attributable to
discontinued operations (including, without limitation,
operations disposed of during such period whether or not such
operations were classified as discontinued) and (g) in the case
of a successor to the Company by consolidation or merger or as a
transferee of the Company's properties and assets, any net income
(or loss) of the Surviving Entity prior to such consolidation,
merger or transfer of properties and assets.
"Consolidated Net Worth" of any Person as of any date means
the consolidated stockholders' equity of such Person, determined
on a consolidated basis in accordance with GAAP, less (without
duplication) amounts attributable to Disqualified Capital Stock
of such Person.
"Consolidated Non-Cash Charges" means, with respect to the
Company, for any period, the aggregate depreciation, depletion,
amortization and other non-cash expenses of the Company and its
Restricted Subsidiaries reducing Consolidated Net Income of the
Company for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the
consolidation of the accounts of the Restricted Subsidiaries of
such Person with those of such Person, all in accordance with
GAAP; provided, however, that "consolidation" will not include
consolidation of the account of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term
"consolidated" has a correlative meaning to the foregoing.
"Covenant Defeasance" has the meaning set forth under "--
Legal Defeasance and Covenant Defeasance."
"Crude Oil and Natural Gas Business" means (i) the
acquisition, exploration, development, operation and disposition
of interests in oil, gas and other Hydrocarbon properties, and
(ii) the gathering, marketing, treating, processing, storage,
selling and transporting of all production from such interests or
properties of the Company or of others.
"Crude Oil and Natural Gas Hedge Agreements" means, with
respect to any Person, any oil and gas agreements or arrangements
or any combination thereof entered into by such Person and that
is designed to provide protection against oil and natural gas
price fluctuations.
"Crude Oil and Natural Gas Properties" means all properties,
including equity or other ownership interests therein, owned by
any Person which have been assigned "proved oil and gas reserves"
as defined in Rule 4-10 of Regulation S-X of the Securities Act
as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any
Investment or capital expenditure (but not including additions to
working capital or repayments of any revolving credit or working
capital borrowings) by the Company or any Restricted Subsidiary
of the Company which is related to the business of the Company
and its Restricted Subsidiaries as it is conducted on the date of
the Asset Sale giving rise to the Net Cash Proceeds to be
reinvested.
"Currency Agreement" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement
designed to protect the Company or any Restricted Subsidiary of
the Company against fluctuations in currency values.
"Default" means an event or condition the occurrence of
which is, or with the lapse of time or the giving of notice or
both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any
Capital Stock which, by its terms (or by the terms of any
security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior
to the final maturity of the Notes. The Company's shares of
Series B and Amended Series A Preferred Stock shall not be deemed
Disqualified Capital Stock.
"Dollar-Denominated Production Payments" means production
payment obligations recorded as liabilities in accordance with
GAAP, together with all undertakings and obligations in
connection therewith.
"Equity Offering" means an offering of Qualified Capital
Stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length,
free market transaction, for cash, between an informed and
willing seller and an informed and willing buyer, neither of whom
is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board
of Directors of the Company acting reasonably and in good faith
and shall be evidenced by a Board Resolution of the Company
delivered to the Trustee; provided, however, that (A) if the
aggregate non-cash consideration to be received by the Company or
any Restricted Subsidiary from any Asset Sale shall reasonably be
expected to exceed $5,000,000 or (B) if the net worth of any
Restricted Subsidiary to be designated as an Unrestricted
Subsidiary shall reasonably be expected to exceed $10,000,000,
the fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board as of any date of determination.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, gas, casinghead gas, drip
gasoline, natural gasoline, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons (including, without
limitation, coal bed methane) and all constituents, elements or
compounds thereof and products processed therefrom.
"incur" has the meaning set forth under "-- Certain
Covenants -- Limitation on Incurrence of Additional
Indebtedness."
"Indebtedness" means, with respect to any Person, without
duplication, (a) all Obligations of such Person for borrowed
money, (b) all Obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (c) all
Capitalized Lease Obligations of such Person, (d) all Obligations
of such Person issued or assumed as the deferred purchase price
of property, all conditional sale obligations and all Obligations
under any title retention agreement (but excluding trade accounts
payable), (e) all Obligations of such Person for the
reimbursement of any obligor on a letter of credit, banker's
acceptance or similar credit transaction, (f) guarantees and
other contingent obligations of such Person in respect of
Indebtedness referred to in clauses (a) through (e) above and
clauses (h) and (i) below, (g) all Obligations of any Person of
the type referred to in clauses (a) through (f) above which are
secured by any Lien on any property or asset of such Person, the
amount of such Obligation being deemed to be the lesser of the
fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations of such Person under
either Crude Oil and Natural Gas Hedging Agreements or Currency
Agreements and Interest Swap Obligations of such Person, (i) all
Obligations of such Person in respect of any Production Payment
or production imbalances and (j) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented
by such Disqualified Capital Stock being equal to the greater of
its voluntary or involuntary liquidation preference and its
maximum fixed redemption price or repurchase price. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to
be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors
of the Company. The "amount" or "principal amount" of
Indebtedness at any time of determination represented by (a) any
Indebtedness issued at a price that is less than the principal
amount at maturity thereof shall be the face amount of the
liability in respect thereof, (b) any Capitalized Lease
Obligation shall be the amount determined in accordance with the
definition thereof, (c) any Interest Swap Obligations or
Indebtedness under either Crude Oil and Natural Gas Hedging
Agreements or Currency Agreements included in the definition of
Permitted Indebtedness shall be zero, (d) all other unconditional
obligations shall be the amount of the liability thereof
determined in accordance with GAAP and (e) all other contingent
obligations shall be the maximum liability at such date of such
Person.
"Independent Advisor" means a reputable accounting,
appraisal or nationally recognized investment banking,
engineering or consulting firm (a) which does not, and whose
directors, officers and employees or Affiliates do not have a
direct or indirect material financial interest in the Company and
(b) which, in the judgment of the Board of Directors of the
Company, is otherwise disinterested, independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any
Person pursuant to any arrangement with any other Person,
whereby, directly or indirectly, such Person is entitled to
receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a
stated notional amount in exchange for periodic payments made by
such other Person calculated by applying a fixed or a floating
rate of interest on the same notional amount and shall include,
without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct
or indirect (i) loan, advance or other extension of credit
(including, without limitation, a guarantee) or capital
contribution to any Person (by means of any transfer of cash or
other property (valued at the fair market value thereof as of the
date of transfer) to others or any payment of property or
services for the account or use of others), (ii) purchase or
acquisition by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness
issued by, any Person (whether by merger, consolidation,
amalgamation or otherwise and whether or not purchased directly
from the issuer of such securities or evidences of Indebtedness),
(iii) guarantee or assumption of the Indebtedness of any other
Person (other than the guarantee or assumption of Indebtedness of
such Person or a Restricted Subsidiary of such Person which
guarantee or assumption is made in compliance with the provisions
of "-- Certain Covenants -- Limitation of Incurrence of
Additional Indebtedness" above), and (iv) other items that would
be classified as investments on a balance sheet of such Person
prepared in accordance with GAAP. Notwithstanding the foregoing,
"Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially
reasonable terms in accordance with normal trade practices of the
Company or such Restricted Subsidiary, as the case may be. The
amount of any Investment shall not be adjusted for increases or
decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. If the Company or any Restricted
Subsidiary sells or otherwise disposes of any Capital Stock of
any Restricted Subsidiary such that, after giving effect to any
such sale or disposition, it ceases to be a Subsidiary of the
Company, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair
market value of the Capital Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means May 20, 1997.
"Legal Defeasance" has the meaning set forth under "-- Legal
Defeasance and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge,
security interest, charge or encumbrance of any kind (including
any conditional sale or other title retention agreement, any
lease in the nature thereof and any agreement to give any
security interest).
"Lube Oil Business" means (i) the acquisition, design,
construction, and operation of lubrication oil plants and the
distribution and marketing of lubrication oils in China and
Southeast Asia and (ii) the joint venture with CNPC United Lube
Oil Corporation with respect to the acquisition, design,
construction and operation of other facilities for the down-
stream processing and treatment, refining, storage, selling and
transporting of refined products.
"Material Change" means an increase or decrease of more than
10% during a fiscal quarter in the discounted future net cash
flows (excluding changes that result solely from changes in
prices) from proved oil and gas reserves of the Company and its
Restricted Subsidiaries (before any state or federal income tax),
calculated in accordance with clause (a)(i) of the definition of
Adjusted Consolidated Net Tangible Assets; provided, however,
that the following will be excluded from the Material Change
calculation: (i) any acquisitions during the quarter of oil and
gas reserves that have been estimated by a nationally recognized
firm of independent petroleum engineers and on which a report or
reports exists, and (ii) any reserves added during the quarter
attributable to the drilling or recompletion of wells not
included in previous reserve estimates, but which will be
included in future quarters.
"Net Cash Proceeds" means, with respect to any Asset Sale,
the proceeds in the form of cash or Cash Equivalents including
payments in respect of deferred payment obligations when received
in the form of cash or Cash Equivalents received by the Company
or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or
payable after taking into account any reduction in consolidated
tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) repayment of Indebtedness that is
required to be repaid in connection with such Asset Sale and (d)
an appropriate amount to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any post closing adjustments or
liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post- employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale (but excluding any
payments which, by the terms of the indemnities will not be made
during the term of the Notes).
"Net Proceeds Offer" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth
under "-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth
under "-- Certain Covenants -- Limitation on Asset Sales."
"Net Working Capital" means (i) all current assets of the
Company and its consolidated Subsidiaries, minus (ii) all current
liabilities of the Company and its consolidated Subsidiaries,
except current liabilities included in Indebtedness, in each case
as set forth in financial statements of the Company prepared in
accordance with GAAP.
"Non-Recourse Indebtedness" with respect to any Person means
Indebtedness of such Person for which (i) the sole legal recourse
for collection of principal and interest on such Indebtedness is
against the specific property identified in the instruments
evidencing or securing such Indebtedness and such property was
acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred within 90 days after the acquisition of
such property and (ii) no other assets of such Person may be
realized upon in collection of principal or interest on such
Indebtedness; provided, however, that any such Indebtedness shall
not cease to be "Non-Recourse Indebtedness" solely as a result of
the instrument governing such Indebtedness containing terms
pursuant to which such Indebtedness becomes recourse upon (a)
fraud or misrepresentation by the Person in connection with such
Indebtedness, (b) such Person failing to pay taxes or other
charges that result in the creation of liens on any portion of
the specific property securing such Indebtedness or failing to
maintain any insurance on such property required under the
instruments securing such Indebtedness, (c) the conversion of any
of the collateral for such Indebtedness, (d) such Person failing
to maintain any of the collateral for such Indebtedness in the
condition required under the instruments securing the
Indebtedness, (e) any income generated by the specific property
securing such Indebtedness being applied in a manner not
otherwise allowed in the instruments securing such Indebtedness,
(f) the violation of any applicable law or ordinance governing
hazardous materials or substances or otherwise affecting the
environmental condition of the specific property securing the
Indebtedness or (g) the rights of the holder of such Indebtedness
to the specific property becoming impaired, suspended or reduced
by any act, omission or misrepresentation of such Person;
provided, however, that upon the occurrence of any of the
foregoing clauses (a) through (g) above, any such Indebtedness
which shall have ceased to be "Non-Recourse Indebtedness" shall
be deemed to have been Indebtedness incurred by such Person at
such time.
"Obligations" means all obligations for principal, premium,
interest, penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation
governing any Indebtedness.
"Payment Restriction" has the meaning set forth under "--
Certain Covenants -- Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of
the following:
(a) Indebtedness under the Notes, the Indenture,
the Pledge Agreement and the Subsidiary Guarantees;
(b) Indebtedness incurred pursuant to one or more
credit facilities with banks and other financial
institutions to be entered into by the Company in an
aggregate principal amount at any time outstanding not to
exceed $5,000,000, reduced by any required permanent
repayments (which are accompanied by a corresponding
permanent commitment reduction) thereunder (the "Maximum
Bank Credit Amount"), and any renewals, amendments,
extensions, supplements, modifications, deferrals,
refinancings or replacements (each, for the purpose of this
clause (b), a "refinancing") thereof, including any
successive refinancing thereof, so long as the aggregate
principal amount of any such new Indebtedness outstanding
pursuant to this clause (b), shall not at any one time
exceed the Maximum Bank Credit Amount;
(c) Interest Swap Obligations of the Company or a
Restricted Subsidiary covering Indebtedness of the Company
or any of its Restricted Subsidiaries; provided, however,
that such Interest Swap Obligations are entered into to
protect the Company and its Restricted Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in
accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligations does not
exceed the principal amount of the Indebtedness to which
such Interest Swap Obligation relates;
(d) Indebtedness of a Restricted Subsidiary to the
Company or to a Wholly Owned Restricted Subsidiary for so
long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary, in each case subject to no Lien
held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary; provided, however, that if as of any
date any Person other than the Company or a Wholly Owned
Restricted Subsidiary owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(e) Indebtedness of the Company to a Wholly Owned
Restricted Subsidiary for so long as such Indebtedness is
held by a Wholly Owned Restricted Subsidiary, in each case
subject to no Lien; provided, however, that (i) any such
Indebtedness of the Company to any Wholly Owned Restricted
Subsidiary that is not a Subsidiary Guarantor is unsecured
and subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the Notes and
(ii) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
(f) Indebtedness arising from the honoring by a
bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such
Indebtedness is extinguished within two Business Days of
incurrence;
(g) Indebtedness of the Company or any of its
Restricted Subsidiaries represented by letters of credit for
the account of the Company or such Restricted Subsidiary, as
the case may be, in order to provide security for workers'
compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary
course of business;
(h) Refinancing Indebtedness;
(i) Capitalized Lease Obligations and Purchase
Money Indebtedness of the Company or any of its Restricted
Subsidiaries not to exceed $5,000,000 at any one time
outstanding;
(j) Permitted Operating Obligations;
(k) Obligations arising in connection with Crude
Oil and Natural Gas Hedge Agreements of the Company or a
Restricted Subsidiary entered into in the ordinary course of
its Crude Oil and Natural Gas Business and not for purposes
of speculation;
(l) Non-Recourse Indebtedness;
(m) Indebtedness under Currency Agreements;
provided, however, that in the case of Currency Agreements
which relate to Indebtedness, such Currency Agreements do
not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result
of fluctuations in foreign currency exchange rates or by
reason of fees, indemnities and compensation payable
thereunder;
(n) additional Indebtedness of the Company or any
of its Restricted Subsidiaries in an aggregate principal
amount at any time outstanding not to exceed the greater of
(i) $3.0 million or (ii) 2.5% of Adjusted Consolidated Net
Tangible Assets of the Company; and
(o) Indebtedness outstanding on the Issue Date.
"Permitted Industry Investments" means, in relation to the
Crude Oil and Natural Gas Business, (i) capital expenditures,
including, without limitation, acquisitions of Company
Properties; (ii) (a) entry into operating agreements, joint
ventures, working interests, royalty interests, mineral leases,
unitization agreements, pooling arrangements or other similar or
customary agreements, transactions, properties, interests or
arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into
in the ordinary course of the oil and gas business, and (b)
exchanges of Company Properties for other Company Properties of
at least equivalent value as determined in good faith by the
Board of Directors of the Company; and (iii) Investments of
operating funds on behalf of co-owners of Crude Oil and Natural
Gas Properties of the Company or a Restricted Subsidiary pursuant
to joint operating agreements.
"Permitted Investments" means (a) Investments by the Company
or any Restricted Subsidiary in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted
Subsidiary or that will merge or consolidate into the Company or
a Wholly Owned Restricted Subsidiary that is not subject to any
Payment Restriction; (b) Investments in the Company by any
Restricted Subsidiary; provided, however, that any Indebtedness
evidencing any such Investment is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) investments in cash and
Cash Equivalents; (d) Investments made by the Company or its
Restricted Subsidiaries as a result of consideration received in
connection with an Asset Sale made in compliance with "-- Certain
Covenants -- Limitation on Asset Sales" above; and (e) Permitted
Industry Investments.
"Permitted Liens" means each of the following types of
Liens:
(a) Liens existing as of the Issue Date (to the
extent and in the manner such Liens are in effect on the
Issue Date);
(b) Liens securing Indebtedness outstanding under a
new credit facility entered into by the Company and Liens
arising under the Indenture;
(c) Liens securing the Notes and the Subsidiary
Guarantees;
(d) Liens of the Company or a Restricted Subsidiary
on assets of any Restricted Subsidiary;
(e) Liens securing Refinancing Indebtedness which
is incurred to refinance, renew, replace, defease or refund
any Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred in
accordance with the provisions of the Indenture; provided,
however, that such Liens (x) are no less favorable to the
Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the
Indebtedness being refinanced, renewed, replaced, defeased
or refunded and (y) do not extend to or cover any property
or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced,
renewed, replaced, defeased or refunded;
(f) Liens for taxes, assessments or governmental
charges or claims either (i) not delinquent or (ii)
contested in good faith by appropriate proceedings and as to
which the Company or a Restricted Subsidiary, as the case
may be, shall have set aside on its books such reserves as
may be required pursuant to GAAP;
(g) statutory and contractual Liens of landlords to
secure rent arising in the ordinary course of business to
the extent such Liens relate only to the tangible property
of the lessee which is located on such property and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen and other Liens imposed by law incurred in the
ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP
shall have been made in respect thereof;
(h) Liens incurred or deposits made in the ordinary
course of business (i) in connection with workers'
compensation, unemployment insurance and other types of
social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent
with past practice in connection therewith, or (ii) to
secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of
borrowed money);
(i) judgment and attachment Liens not giving rise
to an Event of Default;
(j) easements, rights-of-way, zoning restrictions,
restrictive covenants, minor imperfections in title and
other similar charges or encumbrances in respect of real
property not interfering in any material respect with the
ordinary conduct of business of the Company or any of its
Restricted Subsidiaries;
(k) any interest or title of a lessor under any
Capitalized Lease Obligation; provided that such Liens do
not extend to any property or assets which is not leased
property subject to such Capitalized Lease Obligation;
(l) Liens securing Purchase Money Indebtedness of
the Company or any Restricted Subsidiary; provided, however,
that (i) the Purchase Money Indebtedness shall not be
secured by any property or assets of the Company or any
Restricted Subsidiary other than the property and assets so
acquired or constructed and (ii) the Lien securing such
Indebtedness shall be created within 90 days of such
acquisition or construction;
(m) Liens securing reimbursement obligations with
respect to commercial letters of credit which encumber
documents and other property relating to such letters of
credit and products and proceeds thereof;
(n) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual,
or warranty requirements of the Company or any of its
Restricted Subsidiaries, including rights of offset and set-
off;
(o) Liens securing Interest Swap Obligations which
Interest Swap Obligations relate to Indebtedness that is
otherwise permitted under the Indenture and Liens securing
Crude Oil and Natural Gas Hedge Agreements permitted under
the Indenture;
(p) Liens securing Acquired Indebtedness incurred
in accordance with "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness" above; provided,
however, that (i) such Liens secured such Acquired
Indebtedness at the time of and prior to the incurrence of
such acquired Indebtedness by the Company or a Restricted
Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and
(ii) such Liens do not extend to or cover any property or
assets of the Company or of any of its Restricted
Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or
a Restricted Subsidiary and are no more favorable to the
lienholders than those securing the Acquired Indebtedness
prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary;
(q) Liens on, or related to, properties and assets
of the Company and its Subsidiaries to secure all or a part
of the costs incurred in the ordinary course of business of
exploration, drilling, development, production, processing,
transportation, marketing or storage, or operation thereof;
(r) Liens on pipeline or pipeline facilities,
Hydrocarbons or properties and assets of the Company or its
Subsidiaries which arise out of operation of law;
(s) royalties, overriding royalties, revenue
interests, net revenue interests, net profit interests,
revisionary interests, production payments, production sales
contracts, operating agreements and other similar interests,
properties, arrangements and agreements, all as ordinarily
exist with respect to properties and assets of the Company
and its Subsidiaries or otherwise as are customary in the
oil and gas business;
(t) with respect to any properties and assets of
the Company and its Subsidiaries, Liens arising under, or in
connection with, or related to, farm-out, farm-in, joint
operation, area of mutual interest agreements and/or other
similar or customary arrangements, agreements or interests
that the Company or any Subsidiary determines in good faith
to be necessary for the economic development of such
property or assets;
(u) any (a) interest or title of a lessor or
sublessor under any lease, (b) restriction or encumbrance
that the interest or title of such lessor or sublessor may
be subject to (including, without limitation, ground leases
or other prior leases of the demised premises, mortgages,
mechanics' liens, tax liens, and easements), or (c)
subordination of the interest of the lessee or sublessee
under such lease to any restrictions or encumbrance referred
to in the preceding clause (b);
(v) Liens in favor of collecting or payor banks
having a right of setoff, revocation, refund or chargeback
with respect to money or instruments of the Company or any
Restricted Subsidiary on deposit with or in possession of
such bank;
(w) Liens securing Non-Recourse Indebtedness; and
(x) Liens with respect to any properties and assets
of the Company and any Subsidiary and any production and
revenues attributable thereto in favor of any Governmental
agency of the People's Republic of China;
provided, however, no Lien on any property subject to the Lien of
the Pledge Agreement (except a Lien described in clause (c) of
this definition or a nonconsensual Lien described in clause (f)
of this definition) shall be deemed to be a Permitted Lien.
"Permitted Operating Obligations" means Indebtedness of the
Company or any Restricted Subsidiary in respect of one or more
standby letters of credit, bid, performance or surety bonds, or
other reimbursement obligations, issued for the account of, or
entered into by, the Company or any Restricted Subsidiary in the
ordinary course of business (excluding obligations related to the
purchase by the Company or any Restricted Subsidiary of
Hydrocarbons for which the Company or such Restricted Subsidiary
has contracts to sell), or in lieu of any thereof or in addition
to any thereto, guarantees and letters of credit supporting any
such obligations and Indebtedness (in each case, other than for
an obligation for borrowed money, other than borrowed money
represented by any such letter of credit, bid, performance or
surety bond, or reimbursement obligation itself, or any guarantee
and letter of credit related thereto).
"Person" means an individual, partnership, corporation,
unincorporated organization, limited liability company, trust,
estate, or joint venture, or a governmental agency or political
subdivision thereof.
"Pledge Agreement" means the Pledge Agreement between the
Company and the Trustee, as amended from time to time in
accordance with the Indenture.
"Preferred Stock" of any Person means any Capital Stock of
such Person that has preferential rights to any other Capital
Stock of such Person with respect to dividends or redemptions or
upon liquidation.
"Production Payments" means Dollar-Denominated Production
Payments and Volumetric Production Payments, collectively.
"Purchase Money Indebtedness" means Indebtedness the net
proceeds of which are used to finance the cost (including the
cost of construction) of property or assets acquired in the
normal course of business by the Person incurring such
Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is
not Disqualified Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to refinance, renew,
replace, defease or refund, other Indebtedness of the Company or
any of its Restricted Subsidiaries incurred pursuant to clause
(a), (h) or (o) of the definition of "Permitted Indebtedness";
provided that: (i) the principal amount (or accreted value, if
applicable) of such Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the
Indebtedness so exchanged, refinanced, renewed, replaced,
defeased or refunded (plus the amount of related prepayment
penalties, fees and reasonable expenses incurred in connection
therewith); (ii) such Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being
exchanged, refinanced, renewed, replaced, defeased or refunded;
(iii) if the Indebtedness being exchanged, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
payment to the Notes or the Subsidiary Guarantees, such
Refinancing Indebtedness is subordinated in right of payment to
the Notes or the Subsidiary Guarantees, as the case may be, on
terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being
exchanged, refinanced, renewed, replaced, defeased or refunded;
and (iv) such Indebtedness is incurred either by the Company or
by the Restricted Subsidiary that is the obligor on the
Indebtedness being exchanged, refinanced, renewed, replaced,
defeased or refunded.
"Registration Rights Agreement" means the Registration
Rights Agreement dated as of the Issue Date between the Company,
and the Initial Purchaser.
"Related Person" of any Person means any other Person
directly or indirectly owning 10% or more of the outstanding
voting Common Stock of such Person (or, in the case of a Person
that is not a corporation, 10% or more of the equity interest in
such Person).
"Replacement Assets" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "--
Certain Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company
(including, without limitation, XCL-China), unless such
Subsidiary is an Unrestricted Subsidiary or is designated by the
Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant
to and in compliance with "-- Certain Covenants -- Limitation on
Restricted and Unrestricted Subsidiaries" above. Any such
designation may be revoked by a Board Resolution of the Company
delivered to the Trustee, subject to the provisions of such
covenant.
"Sale and Leaseback Transaction" means any direct or
indirect arrangement with any Person or to which any such Person
is a party, providing for the leasing to the Company or a
Restricted Subsidiary of any property, whether owned by the
Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the
Company or such Restricted Subsidiary to such Person or to any
other Person from whom funds have been or are to be advanced by
such Person on the security of such property.
"Subsidiary", with respect to any Person, means (a) any
corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election
of directors under ordinary circumstances shall at the time be
owned, directly or indirectly, by such Person or (b) any other
Person of which at least a majority of the voting interests under
ordinary circumstances is at the time, directly or indirectly,
owned by such Person.
"Subsidiary Guarantor" means XCL-China and each of the
Company's other Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted
Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor, provided, however, that any Person
constituting a Subsidiary Guarantor as described above shall
cease to constitute a Subsidiary Guarantor when its Subsidiary
Guarantee is released in accordance with the Indenture.
"Surviving Entity" has the meaning set forth under "--
Certain Covenants -- Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any Subsidiary of the
Company designated as such pursuant to and in compliance with "--
Certain Covenants -- Limitation on Restricted and Unrestricted
Subsidiaries" above; provided, however, that Unrestricted
Subsidiaries shall initially include all Subsidiaries of the
Company as of the Issue Date (other than XCL-China to the extent
provided in the covenant described under " -- Certain Covenants -
- - Limitation on Capital Stock of Restricted Subsidiaries") and no
Subsidiary whose Capital Stock is subject to the Lien of the
Pledge Agreement may be an Unrestricted Subsidiary. Any such
designation may be revoked by a Board Resolution of the Company
delivered to the Trustee, subject to the provisions of such
covenant.
"Volumetric Production Payments" means production payment
obligations recorded as deferred revenue in accordance with GAAP,
together with all undertakings and obligations in connection
therewith.
"Weighted Average Life of Maturity" means, when applied to
any Indebtedness at any date, the number of years obtained by
dividing (a) the then outstanding aggregate principal amount of
such Indebtedness into (b) the sum of the total of the products
obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required
payment of principal, including payment at final maturity, in
respect thereof, by (ii) the number of years (calculated to the
nearest one-twelfth) which will elapse between such date and the
making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary of which all the outstanding voting securities
normally entitled to vote in the election of directors are owned
by the Company or another Wholly Owned Restricted Subsidiary.
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 September 30, 1998, there were 22,926,333 shares of
Common Stock outstanding, excluding 69,471 shares held in
treasury, held by approximately 3,480 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 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 two 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 Prior 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 shares of Amended Series B Preferred Stock currently
outstanding have an aggregate liquidation preference of
approximately $4.8 million. 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
- --------------------------------
In connection with the Prior Equity Offering, the Company
authorized a new series of preferred stock designated Amended
Series A, Cumulative Convertible Preferred Stock, offered in the
Prior Equity Offering, in a unit comprised of one share of
Amended Series A Preferred Stock and a warrant to purchase 21
shares of Common Stock at $3.0945 per share all as adjusted for
the Reverse Stock Split, subject to adjustment. On May 20, 1997,
the Company placed 294,118 units in the Prior Equity Offering.
Also, effective on May 20, 1997, the Company issued an additional
11,816 shares of Amended Series A Preferred Stock to those
institutional holders of the Company's Secured Subordinated Notes
that subscribed for Amended Series A Preferred Stock in the Prior
Equity Offering, in payment of interest accrued on such Secured
Subordinated Notes being repaid from the proceeds of the Prior
Equity Offering. Effective November 10, 1997, the Company
amended the terms of and combined two of its then outstanding
series of Preferred Stock into the Amended Series A Preferred
Stock issued in the Prior Equity Offering. In connection with
this amendment and combination an additional 790,613 shares of
Amended Series A Preferred Stock were issued. As of September
30, 1998, there were a total of 1,181,614 shares of Amended
Series A Preferred Stock issued and outstanding, including shares
issued in payment of dividends on the Amended Series A Preferred
Stock.
The Amended Series A Preferred Stock provides for a
liquidation preference of $85.00 per share; bears a 9.50%
dividend ($8.075 per share per annum), payable in additional
shares of Amended Series A Preferred Stock (valued at $85.00 per
share) through and including the dividend payment date on
November 1, 2000 and thereafter at the Company's election in cash
or additional shares of Amended Series A Preferred Stock, payable
semiannually on May 1 and November 1 of each year. The Amended
Series A Preferred Stock is redeemable at the option of the
Company, in whole or in part, at any time and from time to time
after May 1, 2002 initially at a redemption price of $90.00 per
share and thereafter at redemption prices which decrease ratably
annually to $85.00 on and after May 1, 2006. The Amended Series
A Preferred Stock is convertible at the holder's option into 11
shares (as adjusted for the Reverse Stock Split) of Common Stock
(equivalent to a conversion price of $7.50 per share), subject to
adjustment, and at the Company's option should the Common Stock
trade for 20 trading days in each 30 consecutive trading day
period at a closing bid price equal to or exceeding 150% of the
prevailing conversion price. In addition to certain special
class voting rights, holders of Amended Series A Preferred Stock
vote together as a single class with the holders of Common Stock
on all matters subject to Common Stockholder vote, the number of
their votes being equal to the number of shares of Common Stock
issuable upon conversion of each share of Amended Series A
Preferred Stock held (currently 11 votes). The Amended Series A
Preferred ranks senior to the Common Stock and pari passu with
the Amended Series B Preferred Stock.
Amended Series B Preferred Stock
- --------------------------------
On March 4, 1998, in connection 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 September 30, 1998, there were reserved an aggregate
of (i) 4,991,691 shares of Common Stock subject to outstanding
options; (ii) 14,840,593 shares issuable upon conversion of the
Company's outstanding Amended Series A Preferred Stock; (iii)
1,250,000 shares issuable upon conversion of the Company's
outstanding Amended Series B Preferred Stock; (iv) 17,060,604
shares issuable upon exercise of the Company's outstanding
warrants; (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) 387,388 shares issuable in connection with
contractual obligations. The Company would receive a total of
approximately $63.2 million if all options and warrants were
exercised and all stock reserved for sale was sold at $3.00 per
share.
Additionally, the Company will have approximately 438
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 6.8 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material United Stated
Federal income tax consequences of the Exchange Offer is for
general information only. It is based on the Internal Revenue
Code of 1986, as amended to the date hereof (the "Code"),
existing and proposed Treasury regulations, and judicial and
administrative determinations, all of which are subject to change
at any time, possibly on a retroactive basis. The following
relates only to the Old Notes, and the Exchange Notes received
therefor, that are held as "capital assets" within the meaning of
Section 1221 of the Code. It does not discuss state, local or
foreign tax consequences, nor, except as otherwise noted, does it
discuss tax consequences to categories of holders that are
subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks and dealers in stocks
and securities. Tax consequences may vary depending on the
particular status of an investor. No rulings will be sought from
the Internal Revenue Service ("IRS") with respect to the Federal
income tax consequences of the Exchange Offer nor will the
Company seek an opinion from tax counsel regarding such matters.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S
DECISION TO PURCHASE THE NOTES. EACH INVESTOR SHOULD CONSULT
WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION OF THE
FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR
SITUATION BEFORE DETERMINING WHETHER TO PURCHASE THE NOTES.
Payments of Interest and Additional Interest; Original Issue
Discount
- ----------------------------------------------------------------
In general, interest on a Note will be taxable to a
beneficial owner who or which is (i) a citizen or resident of the
United States, (ii) a corporation created or organized under the
laws of the United States or any State thereof (including the
District of Columbia), (iii) a person otherwise subject to United
States Federal income taxation on its worldwide income (a "U.S.
Holder") as ordinary income at the time it is received or
accrued, depending on the U.S. Holder's method of accounting for
tax purposes.
The Company is obligated to pay Additional Interest to the
U.S. Holders of Old Notes under certain circumstances described
under "Exchange Offer; Registration Rights." It is believed that
any such payment should be taxable to U.S. Holders at the time it
is received or accrued, depending on the U.S. Holder's method of
accounting for tax purposes.
The Old Notes were not issued, with original issue discount
for federal income tax purposes because the total amount of
original issue discount on issuance of the Old Notes was less
than the de minimis amount permitted pursuant to Section
1273(a)(3) of the Code. The Exchange Offer will not have an
effect on the amount of original issue discount on the Notes.
Optional Redemption or Repurchase
- ---------------------------------
The Notes are subject to redemption at the option of the
Company, on or after February 15, 2002, at the applicable
redemption price plus any accrued and unpaid interest, and to
purchase at the option of each holder thereof upon a Change of
Control for 101% of the principal amount plus any accrued and
unpaid interest. Furthermore, under certain circumstances, the
Company may become obligated to purchase all or a portion of the
Notes at 101% of the principal amount plus any accrued and unpaid
interest, with the proceeds of certain Asset Sales. See
"Description of Notes." Upon the optional redemption or purchase
of a Note, it is expected that the difference between the amount
received by such holder and the holder's adjusted tax basis in
the Note will be taxable as capital gain or loss, if the Note is
held as a capital asset (subject to the market discount rules
discussed below).
Payments of Principal; Dispositions
- -----------------------------------
Subject to the discussion of the Exchange Offer below, upon
the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a U.S. Holder will generally recognize
taxable gain or loss equal to the difference between the sum of
cash plus the fair market value of all other property received on
such disposition (except to the extent such cash or property is
attributable to accrued but unpaid interest or market discount,
which will be taxable as ordinary income) and such U.S. Holder's
adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in a Note generally will equal the cost of the Note to such
U.S. Holder (increased for accrued original issue discount, if
any), less any principal payment received by such U.S. Holder.
Gain or loss realized by a U.S. Holder on the sale, redemption or
other disposition of an Old Note or an Exchange Note generally
will be long-term capital gain or loss subject to tax at a rate
of twenty percent if, at the time of the disposition, the Note
has been held for more than eighteen months. If the holding
period of the Note at the time of disposition is more than one
year but not more than eighteen months, the gain or loss will be
mid-term gain or loss, subject to tax at a rate of twenty-eight
percent. Gain recognized on a disposition of Notes held for one
year or less will be subject to tax at the rate imposed on
ordinary income.
Amortizable Bond Premium
- ------------------------
If a U.S. Holder pays an amount (exclusive of accrued and
unpaid interest through the acquisition date) in excess of the
Note's stated redemption price at maturity at the time of its
acquisition ("Bond Premium"), the U.S. Holder may elect to
amortize Bond Premium. If Bond Premium is amortized, the amount
of interest that must be included in the U.S. Holder's income
from each period ending on an interest payment date or stated
maturity, as the case may be, will be reduced by the portion of
the Bond Premium allocable to such period based on the Note's
yield to maturity and the U.S. Holder's adjusted basis in the
Notes will be reduced accordingly. This election applies to all
Notes acquired by the U.S. Holder during the year of election and
thereafter.
Market Discount
- ---------------
A U.S. Holder, other than an initial Holder, will be treated
as holding a Note at a market discount (a "Market Discount Note")
if the amount for which such U.S. Holder purchased the Note is
less than the Note's stated redemption price at maturity.
In general, any partial payment of principal on, or gain
recognized on the maturity, optional redemption or repurchase, or
disposition of, a Market Discount Note will be treated as
ordinary interest income to the extent that such gain does not
exceed the accrued market discount on such Note. Alternatively,
a U.S. Holder of a Market Discount Note may elect to include
market discount in income currently over the life of the Market
Discount Note. Such an election applies to all debt instruments
with market discount acquired by the electing U.S. Holder on or
after the first day of the first taxable year to which the
election applies and may not be revoked without the consent of
the IRS.
Market discount accrues on a straight-line basis, unless the
U.S. Holder elects to accrue such discount on a constant yield to
maturity basis. Such an election is applicable only to the Note
with respect to which it is made and is irrevocable. A U.S.
Holder of a Market Discount Note that does not elect to include
market discount in income currently generally will be required to
defer deductions for interest on borrowings allocable to such
Note, in an amount not exceeding the accrued market discount on
such Note, until the maturity or disposition of such Note. If
such Note is disposed of in a non-taxable transaction (other than
a nonrecognition transaction described in Section 1276(c) of the
Code) accrued market discount will be includable as ordinary
income to the U.S. Holder as if such U.S. Holder had sold the
Note at its then fair market value.
The Exchange Offer
- ------------------
Pursuant to Treasury regulations, the exchange of Old Notes
for Exchange Notes pursuant to the Exchange Offer should not
constitute a significant modification of the terms of the Old
Notes because it does not result in an alteration of the legal
rights of the Holders; it merely implements the Registration
Rights that the Holders have pursuant to the Old Notes.
Accordingly, such exchange should be treated as a non-taxable
exchange which should have no Federal income tax consequences to
Holders of Old Notes. Each Holder of Old Notes who receives
Exchange Notes would continue to include interest on the Exchange
Notes in its gross income in accordance with its method of
accounting for Federal income tax purposes. Holders of Old Notes
who do not exchange Notes pursuant to the Exchange Offer will be
unaffected by the Exchange Offer.
Non-U.S. Holders
- ----------------
A non-U.S. Holder will not be subject to withholding of
United States Federal income taxes on payments of principal,
premium (if any) or interest (including original issue discount,
if any) on a Note, provided in the case of interest that (i) the
beneficial owner does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock
of the Company entitled to vote, (ii) the beneficial owner is not
a controlled foreign corporation that is related to the Company
through stock ownership, (iii) the beneficial owner is not a bank
which receives interest on an extension of credit made pursuant
to a loan agreement entered into in the ordinary course of its
trade or business, (iv) the beneficial owner provides the
ownership statement described below, and (v) such interest is not
contingent interest under Section 871(h)(4)(A) of the Code and
the regulations thereunder. To qualify for the exemption from
taxation, the last United States payor in the chain of payment
prior to payment to a non-U.S. Holder (the "Withholding Agent")
must have received in the year in which a payment of interest or
principal occurs, or in either of the two preceding calendar
years, a statement that (i) is signed by the beneficial owners of
the Note under penalties of perjury, (ii) certifies that such
owner is not a U.S. Holder and (iii) provides the name and
address of the beneficial owner. The statement may be made on an
IRS Form W-8 or a substantially similar form, and the beneficial
owner must inform the Withholding Agent of any change in the
information on the statement within 30-days of such change. If a
Note is held through a securities clearing organization or
certain other financial institutions, the organization or
institution may provide a signed statement under penalties of
perjury to the Withholding Agent. In such case, however, the
signed statement must be accompanied by a copy of the IRS Form W-
8 or the substitute form provided by the beneficial owner to the
organization or institution. Under recently issued Treasury
Regulations that become effective on January 1, 1999, a
"qualified intermediary" such as a foreign financial institution
or clearing organization may provide an intermediary withholding
certificate to the Withholding Agent without the need to file a
Form W-8 from each beneficial owner.
A non-U.S. Holder will not be subject to withholding of
United States Federal income taxes on any amount which
constitutes capital gain upon retirement or disposition of a
Note.
If a non-U.S. Holder cannot satisfy the requirements of the
"portfolio interest" exception described above, payments of
premium and interest (including original issue discount) made to
such non-U.S. Holder will be subject to a 30% withholding tax
unless the beneficial owner of the Note provides the Company or
its paying agent, as the case may be, with a properly executed
(1) IRS Form 1001 (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty or (2) IRS Form
4224 (or successor form) stating that interest paid on the Note
is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or
business in the United States. Unless recently issued Treasury
Regulations that become effective on January 1, 1999 reduced
withholding under a tax treaty and an exemption from withholding
for effectively connected income will be claimed on Form W-8. It
will be necessary to provide a taxpayer identification number to
claim reduced withholding under a tax treaty.
If a non-U.S. Holder is engaged in a trade or business in
the United States and interest (including original issue
discount) on the Note is effectively connected with the conduct
of such trade or business, the non-U.S. Holder, although exempt
from the withholding tax discussed above, will be subject to
United States federal income tax on such interest and original
issue discount on a net income basis in the same manner as if it
were a U.S. Holder. In addition, if such non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax
equal to 30% (or lower treaty rate) of its effectively connected
earnings and profits for the taxable year, including such
premium, if any, and interest (including original issue discount)
on the Note.
Any gain realized upon the sale, exchange, retirement or
other disposition of a Note generally will not be subject to
United States federal income tax unless (i) such gain is
effectively connected with a trade or business in the United
States of the non-U.S. Holder, or (ii) in the case of a non-U.S.
Holder who is an individual, such individual is present in the
United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain
other conditions are met.
The Notes will not be includable in the estate of a non-U.S.
Holder provided that such individual does not actually or
constructively own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote and
provided that at the time of such individual's death, payments in
respect of the Notes would not have been effectively connected
with the conduct by such individual of a trade or business in the
United States.
Information Reporting and Backup Withholding
- --------------------------------------------
Backup withholding of United States Federal income tax at a
rate of 31% may apply to payments of principal, interest,
original issue discount or premium made in respect of the Notes
to registered owners who are not "exempt recipients" and who fail
to provide certain identifying information (such as the
registered owner's taxpayer identification number) in the
required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities
generally are exempt recipients. Payments made in respect of the
Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption.
Compliance with the identification procedures described in the
preceding section would establish an exemption from backup
withholding and information reporting for those non-U.S. Holders
who are not exempt recipients provided that the payor does not
have actual knowledge that the beneficial owner is a United
States person.
In addition, backup withholding and information reporting
will not apply if payments of the principal, interest, original
issue discount or premium on a Note are paid or collected by a
foreign office of a custodian, nominee or other foreign agent on
behalf of the beneficial owner of such Note, or if a foreign
office of a broker pays the proceeds of the sale of a Note to the
owner thereof. If, however, such nominee, custodian, agent or
broker is a United States person, a controlled foreign
corporation or a foreign person that derives 50% or more of its
gross income from the conduct of a trade or business in the
United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless
(1) such custodian, nominee, agent or broker has documentary
evidence in its records that the beneficial owner is not a United
States person and certain other conditions are met or (2) the
beneficial owner establishes an exemption.
Payments of principal, interest, original issue discount and
premium on a Note paid to the beneficial owner of a Note by a
United States office of a custodian, nominee or agent, or the
payment by the United States office of a broker of the proceeds
of sale of a Note will be subject to both backup withholding and
information reporting unless the beneficial owner provides the
statement referred to above and the payer does not have actual
knowledge that the beneficial owner is a United States person, or
the beneficial owner otherwise establishes as exemption.
Any amounts withheld under the backup withholding rules from
a payment to a beneficial owner would be allowed as a refund or a
credit against such beneficial owner's United States Federal
income tax provided the required information is furnished to the
IRS.
BOOK ENTRY - DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange
Notes will be issued in the form of one or more fully registered
Global Notes (collectively, the "Global Note"). The Global Note
will be deposited with, or on behalf of, DTC and registered in
the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to
Accredited Investors who are not qualified institutional buyers
or (ii) held by qualified institutional buyers which elect to
take physical delivery of their certificates instead of holding
their interest through the Global Note (and which are thus
ineligible to trade through DTC) (collectively referred to herein
as the "Non-Global Purchasers") will be issued in registered
certificated form ("Certificated Securities"). Upon the transfer
to a qualified institutional buyer of any Certificated Security
initially issued to a Non-Global Purchaser, such Certificated
Security will, unless the transferee requests otherwise or the
Global Note has previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in the
Global Note.
The Company expects that pursuant to procedures established
by DTC (i) upon deposit of the Global Note, DTC or its custodian
will credit, on its internal system, portions of the Global Note
which shall be comprised of the corresponding respective
principal amount of the Global Note to the respective accounts of
persons who have accounts with such depositary and (ii) ownership
of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC
or its nominee (with respect to interests of participants (as
described below)) and the records of participants (with respect
to interests of persons other than participants). Such accounts
initially will be designated by or on behalf of the Initial
Purchaser and ownership of beneficial interests in the Global
Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through
participants. Qualified institutional buyers may hold their
interests in the Global Note directly through DTC if they are
participants in such system, or indirectly through organizations
which are participants in such system.
So long as DTC, or its nominee, is the registered owner or
holder of the Notes, DTC or such nominee will be considered the
sole owner or holder of the Notes represented by the Global Note
for all purposes under the Indenture. No beneficial owner of an
interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures,
in addition to those provided for under the Indenture with
respect to the Notes.
Payments of the principal of, premium (if any) and interest
(including Additional Interest) on the Global Note will be made
to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Payment
Agent will have any responsibility or liability for any aspect of
the records relating to or payments made on account of any
beneficial ownership interest in the Global Note or for
maintaining, supervising or reviewing any records relating to any
such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of
any payment of the principal of, premium (if any) and interest
(including Additional Interest) on the Global Note, will credit
participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of
such Global Note as shown on the records of DTC or its nominee.
The Company also expects that payments by participants to owners
of beneficial interests in the Global Note held through such
participants will be governed by standing instructions and
customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for
such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in
the ordinary way in accordance with DTC rules and will be settled
in accordance with DTC rules in same day funds. If a holder
requires physical delivery of a Certificated Security for any
reason, including to sell Notes to persons in states which
require physical delivery of such securities or to pledge such
securities, such holder must transfer its interest in the Global
Note in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action
permitted to be taken by a holder of Notes (including the
presentation of notes for exchange as described below) only at
the direction of one or more participants to whose account the
DTC interests in the Global Note are credited and only in respect
to such portion of Notes, the aggregate principal amount of Notes
as to which such Participant or Participants have given such
direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for Certificated
Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited
purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code
and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and participants and facilitate
the clearance and settlement of securities transactions between
participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC System
is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship
with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Note among
participants of DTC, it is under no obligation to perform such
procedures, and such procedures may be discontinued at any time.
None of the Company, the Trustee or the Warrant Agent will have
any responsibility for the performance by DTC or its participants
or indirect participants of their respective obligations under
the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a
depositary for the Global Note and a successor depositary is not
appointed by the Company, within 90 days, the Company will issue
Certificated Securities in exchange for the Global Note.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The
Company has agreed that it will make this Prospectus, as amended
or supplemented, available to any broker-dealer for use in
connection with any such resale for a period of 180 days after
consummation of the Exchange Offer, or such shorter period as
will terminate when all Old Notes acquired by broker-dealers for
their own accounts pursuant to the Exchange Offer as a result of
market-making activities or other trading activities have been
exchanged for Exchange Notes and resold by such broker-dealers.
A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
The Company will not receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account may be sold from time to
time in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the
Securities Act. For a period of 180 days after consummation of
the Exchange Offer, or such shorter period as will terminate when
all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading
activities have been exchanged for Exchange Notes and resold by
such broker-dealers, the Company will promptly send additional
copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in
the Letter of Transmittal. The Company has agreed in the
Registration Rights Agreement to indemnify such broker-dealers
against certain liabilities, including liabilities under the
Securities Act.
The Old Notes not exchanged in the Exchange Offer for
Exchange Notes will remain subject to the transfer restrictions
described below.
TRANSFER RESTRICTIONS ON THE OLD NOTES
None of the Old Notes has been registered under the
Securities Act and they may not be offered or sold within the
United States or to, or for the account or benefit of U.S.
persons except pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities
Act. Accordingly, the Old Notes were offered and sold only (A) to
a limited number of "qualified institutional buyers" (as defined
in Rule 144A ("Rule 144A") promulgated under the Securities Act)
("QIBs") in compliance with Rule 144A, (B) to a limited number of
other institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act) ("Accredited
Investors") that, prior to their purchase of any Units, delivered
to the Company a letter in the form of Appendix A to the Offering
Memorandum with respect to the Debt Units containing certain
representations and agreements, and (C) outside the United States
to persons other than U.S. persons ("foreign purchasers," which
term shall include dealers or their professional fiduciaries in
the United States acting on a discretionary basis for foreign
beneficial owners, other than an estate or trust) in reliance
upon Regulation S under the Securities Act ("Regulation S"). As
used herein, the terms "United States" and "U.S. person" have the
meaning given to them in Regulation S.
Each purchaser of Old Notes was deemed to have represented
and agreed as follows:
1. It is purchasing the Debt Units for its own
account or an account with respect to which it exercises
sole investment discretion and that it and any such account
is either (A) a QIB, and is aware that the sale to it is
being made in reliance on Rule 144A, (b) an Accredited
Investor, or (C) a foreign purchaser that is outside the
United States (or a foreign purchaser that is a dealer or
other fiduciary as referred to above).
2. It acknowledges that Debt Units and the
securities comprising the Debt Units (collectively, the
"Securities") have not been registered under the Securities
Act and may not be offered or sold within the United States
or to, or for the account or benefit of, U.S. persons
except as set forth below.
3. It shall not resell or otherwise transfer any of
such Securities within two years after the original issuance
of the Securities except (A) to the Company or any of its
subsidiaries, (B) inside the United States to a QIB in a
transaction complying with Rule 144A, (C) inside the United
States to an Accredited Investor that, prior to such
transfer, furnishes (or has furnished on its behalf by a
U.S. broker-dealer) to the Company and the Trustee or the
Warrant Agent, as the case may be, a signed letter
containing certain representations and agreements relating
to the restrictions on transfer of the Securities (the form
of which letter can be obtained from the Company or such
Trustee and Warrant Agent), (D) outside the United States in
compliance with Rule 904 under the Securities Act, (E)
pursuant to an exemption from registration provided by Rule
144 under the Securities Act (if available), or (F) pursuant
to an effective registration statement under the Securities
Act. Each Accredited Investor that was not a QIB and that
was an original purchaser of any of the Units was required
to sign a letter to the foregoing effect.
4. It agrees that it will give to each person to
whom it transfers the Securities notice of any restrictions
on such Securities.
5. It understands that all of the Securities will
bear a legend substantially to the following effect unless
otherwise agreed by the Company and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED
OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET
FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3), OR
(7) UNDER THE SECURITIES ACT) (AN "ACCREDITED
INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 903 OR 904 UNDER THE SECURITIES
ACT, (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER
THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR
OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE
COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES (OR
HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO
THE COMPANY AND THE TRUSTEE OR THE WARRANT AGENT, AS
THE CASE MAY BE, A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF
WHICH LETTER CAN BE OBTAINED FROM THE COMPANY OR THE
TRUSTEE AND WARRANT AGENT FOR THIS SECURITY), (D)
OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR
(F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL
GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS
SECURITY WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE
OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS AN
INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST,
PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE OR THE
WARRANT AGENT AND THE COMPANY SUCH CERTIFICATIONS,
WRITTEN LEGAL OPINIONS OR OTHER INFORMATION AS EITHER
OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND
"U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS
AGREEMENT DATED AS OF MAY 20, 1997 BETWEEN THE COMPANY
AND JEFFERIES & COMPANY, INC., A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY.
6. Except as permitted by the Purchase Agreement
(as defined herein), it will not offer, sell or deliver the
Debt Units, the Old Notes, the Debt Warrants or the Common
Stock issuable upon exercise of the Debt Warrants (i) as
part of the distribution at any time or (ii) otherwise until
40 days (or such longer period as may be required under
Regulation S as then in effect) after the later of the
commencement of the Debt Offering and the last original
issue date of the Debt Units, within the United States or
to, or for the account or benefit of, U.S. persons, and that
it will send to each dealer to which it sells Securities in
reliance on Regulation S during the restricted period a
confirmation or other notice setting forth the restrictions
on offers and sales of the Securities within the United
States or to, or for the account or benefit of, U.S.
persons. During the period from May 13, 1997 to the date of
its purchase of the Debt Units, it did not, and from such
date through the expiration of such 40 day (or longer)
period, it will not, execute or effect or cause to be
executed or effected, directly or indirectly, any short
sale, option or swap transaction in or with respect to the
Common Stock of the Company or any other derivative security
transaction for its own account, if it is purchasing for its
own account, or, if it is purchasing the Debt Units for the
account of another person or entity, for such account, the
purpose or effect of which is to hedge or transfer to a
third party all or any part of the risk of loss associated
with the ownership of the Securities by the purchaser. Terms
used in this paragraph have the meanings given to them by
Regulation S under the Securities Act.
7. Until the expiration of the 40-day period (or
such longer period) referred to above, an offer or sale of
Debt Units, Old Notes, Debt Warrants or the Common Stock
issuable upon exercise of the Debt Warrants within the
United States by a dealer (whether or not participating in
the offering) may violate the registration requirements of
the Securities Act if such offer or sale is made otherwise
than in a transaction complying with the requirements of
Rule 144A under the Securities Act or pursuant to an
exemption from registration under the Securities Act.
8. If it is a foreign person, it shall not exercise
the Debt Warrants in the United States or by or on behalf of
any U.S. person unless the Debt Warrants and the Debt
Warrant Shares are registered under the Securities Act and
all applicable state securities or blue sky laws or an
exemption from such registration is available.
9. It shall not sell or otherwise transfer such
Securities to, and each purchaser represents and covenants
that it is not acquiring the Securities for or on behalf of,
and will not transfer the Securities to, any pension or
welfare plan (as defined in Section 3 of the Employee
Retiree Income Security Act of 1974 ("ERISA")), except that
such a purchase for or on behalf of a pension or welfare
plan shall be permitted:
a. to the extent such purchase is made by or on
behalf of a bank collective investment fund maintained
by the purchaser in which, at any time while the
Securities are held by the purchaser, no plan (together
with any other plans maintained by the same employer or
employee organization) has an interest in excess of 10%
of the total assets in such collective investment fund
and the conditions of Section III of Prohibited
Transaction Class Exemption 91-38 issued by the
Department of Labor are satisfied;
b. to the extent such purchase is made by or on
behalf of insurance company pooled separate account
maintained by the purchaser in which, at any time while
the Securities are held by the purchaser, no plan
(together with any other plans maintained by the same
employer and employee organization) has an interest in
excess of 10% of the total of all assets in such pooled
separate account and the conditions of Section III of
Prohibited Transactions Class Exemption 90-1 issued by
the Department of Labor are satisfied;
c. to the extent such purchase is made by or on
behalf of an insurance company general account
maintained by the purchaser in which, at any time while
the Securities are held by purchaser, the conditions of
Prohibited Transactions Class Exemption 95-60 issued by
the Department of Labor are satisfied;
d. to the extent such purchase is made on behalf
of a plan by (i) an investment adviser registered under
the Investment Advisers Act of 1940 that had as of the
last day of its most recent fiscal year total assets
under its management and control in excess of
$50,000,000 and had stockholders' or partners' equity
in excess of $750,000, as shown in its most recent
balance sheet prepared in accordance with generally
accepted accounting principles, (ii) a bank as defined
in Section 202(a)(2) of the Investment Advisers Act of
1940 with equity capital in excess of $1,000,000 as of
the last day of its most recent fiscal year, (iii) an
insurance company which is qualified under the laws of
more than one state to manage, acquire or dispose of
any assets of any plan, which insurance company has, as
of the last day of its most recent fiscal year, net
worth in excess of $1,000,000 and which is subject to
supervision and examination by a state authority having
supervision over insurance companies, or (iv) a savings
and loan association, the accounts of which are insured
by the Federal Savings and Loan Insurance Corporation,
that has made application for and been granted trust
powers to manage, acquire or dispose of assets of a
plan by a State or Federal authority having supervision
over savings and loan associations, which savings and
loan association has, as of the last day of its most
recent fiscal year, equity capital or net worth in
excess of $1,000,000 and, in any case, such investment
adviser, bank, insurance company or savings and loan is
otherwise a qualified professional asset manager, as
such term is used in Prohibited Transactions Exception
84-14 issued by the Department of Labor, and the assets
of such plan when combined with the assets of other
plans established or maintained by the same employer
(or affiliate thereof) or employee organization and
managed by such investment adviser, bank, insurance
company or savings and loan do not represent more than
20% of the total client assets managed by such
investment adviser, bank, insurance company or savings
and loan and the conditions of Section I of such
exemption are otherwise; or
e. to the extent such plan is a governmental
plan (as defined in Section 3 of ERISA) which is not
subject to the provisions of Title I of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as
amended.
10. It acknowledges that the Trustee and Warrant
Agent for the Securities will not be required to accept for
registration of transfer any Securities acquired by it,
except upon presentation of evidence satisfactory to the
Company and the Trustee or the Warrant Agent, as the case
may be, that the restrictions set forth herein have been
complied with.
11. It acknowledges that the Company, the Initial
Purchaser and others will rely upon the truth and accuracy
of the foregoing acknowledgments, representations and
agreements and agrees that if any of the acknowledgments,
representations or agreements deemed to have been made by
its purchase of the Securities are no longer accurate, it
shall promptly notify the Company and the Initial Purchaser.
If it is acquiring the Securities as a fiduciary or agent
for one or more investor accounts, it represents that it has
sole investment discretion with respect to each such account
and it has full power to make the foregoing acknowledgments,
representations, and agreements on behalf of each account.
LEGAL MATTERS
The validity of the Exchange Notes issued pursuant to the
Exchange Offer is being passed upon for the Company by Satterlee
Stephens Burke & Burke LLP, New York, New York.
EXPERTS
The consolidated balance sheets of the Company and XCL-China
Ltd. as of December 31, 1997 and 1996 and the consolidated
statements of operations, shareholders' equity, and cash flows
for each of 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 PricewaterhouseCoopers LLP, independent accountants, given on
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. referenced 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.
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.
"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" means reserves that can be
expected to be recovered through existing wells with
existing equipment and operating methods 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 the estimated
quantities of crude oil, natural gas, and NGLs 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.
"Proved undeveloped reserves" means 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.
"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.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
XCL Ltd.
- ---------
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997
Notes to Consolidated Financial Statements
Supplemental Information
Schedule II - Valuation and Qualifying Accounts
Unaudited Consolidated Balance Sheet as of June 30, 1998
Unaudited Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997
Unaudited Consolidated Statements of Shareholders' Equity
for the six months ended June 30, 1998
Unaudited Consolidated Statements of Cash Flow for the six months
ended June 30, 1998 and 1997
Notes to Unaudited Consolidated Financial Statements
XCL-China Ltd.
- --------------
Report of Independent Accountants
Balance Sheets as of December 31, 1997 and December 31, 1996
Statements of Operations for each of the three years in the
period ended December 31, 1997
Statements of Shareholders' Deficit for each of the three
years in the period ended December 31, 1997
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997
Notes to Financial Statements
Supplemental Information
<PAGE>
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 substantial 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.
/S/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
April 10, 1998
<PAGE>
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 undeveloped properties, 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.
<PAGE>
<TABLE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended December 31
--------------------------
1997 1996 1995
---- ---- ----
<CAPTION>
<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 ofinvestments/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.
<PAGE>
<TABLE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands of Dollars)
Total
Preferred Common Treasury Paid-In Accumulated Unearned Shareholders'
Stock Stock Stock Capital Deficit Compensation Equity
--------- ------ -------- ------- ----------- ------------ -----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <S> <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.
<PAGE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31
---------------------------------
1997 1996 1995
---- ---- ----
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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
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:
Common Stock
Issuable Upon Warrant Exercise Proceeds if
Exercise Price Exercised
---------- --------------- ---------
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
========== ==========
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.
All of the restricted stock awards entitle the participants
to full dividend and voting rights and are restricted as to
disposition and subject to forfeiture under certain conditions.
The shares become unrestricted upon attainment of certain
increases in the market price of the Company's Common Stock
within four years from date of grant, as provided for in the
plan. Upon issuance of restricted shares, unearned compensation
is charged to shareholders' equity for the cost of restricted
stock and recognized as expense ratably over the earned 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 at 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):
Year Ended December 31
----------------------
1997 1996 1995
---- ---- ----
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)
==== ====== =======
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):
Year Ended December 31
-----------------------------------
1994
Total 1997 1996 1995 and Prior
----- ---- ---- ---- --------
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
====== ====== ===== ===== ======
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):
Year Ended December 31
------------------------
1997 1996 1995
---- ---- ----
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
====== ===== ======
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 FASB No. 69 is summarized below, and does not
purport to present the fair market value of the Company's oil and
gas assets, but does present the present value of estimated
future cash flows that would result under the assumptions used.:
The Company previously excluded from this table, the effect of
income taxes because it believed it had a tax holiday in China.
Subsequent to December 31, 1997, the Company determined that it
would be subject to future income taxes at the maximum rate of
33% in China. Accordingly, the table below has been revised to
include estimates of such income taxes.
<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 (45,623) (39,033) (20,937)
Development (41,093) (40,904) (35,276)
------- ------- -------
Future net inflows before income taxes 119,049 142,860 46,835
Future income taxes (c) (22,916) (35,658) -- (b)
------- ------- ------
Future net cash flows 96,133 107,202 46,835
10% discount factor (42,285) (44,596) (20,795)
------- ------- ------
Transfer of properties to assets held for sale -- -- (26,040)
-------- ------ ------
Standardized measure of discounted net cash flows $ 53,848 $ 62,606 $ --
======== ======= =======
</TABLE>
_____________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties being held for sale only.
(b) No taxes have been reflected because of utilization of
net operating loss carryforwards.
(c) Future income taxes are computed by applying the maximum
tax rate in China applicable to foreign-funded enterprises
of 33%.
Changes in Standardized Measure of Discounted Future Net Cash
Flow From Proven Reserve Quantities
Year Ended December 31
-------------------------------
1997 (a) 1996 (a) 1995 (a)
-------- -------- --------
(Thousands of Dollars)
Standardized measure-beginning of year $ 62,606 $ -- $ 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 (219) -- (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)
Net change in income taxes 7,857 (16,456) --
------- ------ -------
Standardized measure-end of year $ 53,848 $ 62,606 $ --
======= ======= =======
__________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties being held for sale 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>
<PAGE>
XCL Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEET
as of June 30, 1998
(In Thousands of Dollars)
(Unaudited)
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 11,369
Cash held in escrow (restricted) 5,239
Accounts receivable, net 188
Refundable deposits --
Other 814
-------
Total current assets 17,610
-------
Property and equipment:
Oil and gas properties (full cost method):
Proved undeveloped properties, not being amortized 26,954
Unevaluated properties 40,875
-------
67,829
Other 1,405
-------
69,234
Accumulated depreciation, depletion and amortization (941)
-------
68,293
-------
Investments 4,724
Investment in land 12,200
Oil and gas properties held for sale 9,078
Debt issue costs, less amortization 4,024
Other assets 1,275
-------
Total assets $ 117,204
=======
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 $ 925
Accrued interest 1,949
Due to joint venture partner 5,079
Dividends payable 1,611
Current maturities of long- term debt 2,074
-------
Total current liabilities 11,638
-------
Long-term debt, net of current maturities 62,384
Other non-current liabilities 5,383
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock-$1.00 par value; authorized 2.4
million shares; issued shares of 1,230,019 at
June 30, 1998 - liquidation preference of $105
million at June 30, 1998 1,230
Common stock-$.01 par value; authorized 500 million
shares; issued shares of 22,991,191 at
June 30, 1998 230
Common stock held in treasury - $.01 par value;
69,470 shares (1)
Additional paid-in capital 304,195
Accumulated deficit (256,153)
Unearned compensation (11,702)
-------
Total shareholders' equity 37,799
-------
Total liabilities and shareholders'
equity $ 117,204
========
The accompanying notes are an integral part of these financial statements.
<PAGE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1998 and 1997
(In Thousands, Except Per Share Amounts)
(Unaudited)
1998 1997
---- ----
Costs and operating expenses:
General and administrative $ 2,915 $ 1,562
Other, net 72 28
------ -------
2,987 1,590
------ -------
Operating loss (2,987) (1,590)
Other income (expense):
Interest income 718 498
Interest expense, net of amounts capitalized (1,852) (1,646)
Other, net 1 312
------ ------
(1,133) (836)
Net loss (4,120) (2,426)
Preferred stock dividends (4,879) (3,316)
------ ------
Net loss attributable to common stock $ (8,999) $ (5,742)
====== ======
Net loss per common share (basic) $ (.40) $ (.29)
====== ======
Net loss per common share (diluted) $ (.40) $ (.29)
====== ======
Weighted average number of common shares outstanding:
Basic 22,622 19,511
Diluted 22,622 19,511
The accompanying notes are an integral part of these financial statements.
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
Additional 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, 1997 $1,196 $ 217 $ (1) $298,588 $ (247,154) $ (12,021) $ 40,825
Net loss -- -- -- -- (4,120) -- (4,120)
Dividends -- -- -- -- (4,879) -- (4,879)
Preferred shares issued 57 -- -- 4,630 -- -- 4,687
Preferred shares converted
to common shares (23) 6 -- 17 -- -- --
Common shares issued -- 1 -- 222 -- -- 223
Exercise of stock purchase
warrants -- 6 -- 325 -- -- 331
Amortization of
unearned compensation -- -- -- -- -- 319 319
Earned Compensation -
stock options -- -- -- 413 -- -- 413
----- ----- ------ ------- --------- -------- -------
Balance, June 30, 1998 $1,230 $ 230 $ (1) $304,195 $ (256,153) $ (11,702) $ 37,799
===== ===== ====== ======= ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
</PAGE>
<PAGE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(In Thousands of Dollars)
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (4,120) $ (2,426)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation, depletion and amortization 50 80
Amortization of discount on senior secured notes 1,074 --
Stock compensation programs 732 --
Stock issued for outside professional services 223 --
Changes in assets and liabilities:
Accounts receivable (87) (17)
Refundable deposits 1,200 --
Accounts payable and accrued costs 15 (451)
Accrued interest 129 2,205
Other, net (162) 98
-------- -------
Total adjustments 3,174 1,915
-------- -------
Net cash used in operating activities (946) (511)
-------- -------
Cash flows from investing activities:
Change in cash held in escrow (restricted) 5,024 (75,000)
Note receivable (362) --
Capital expenditures (13,424) (5,025)
Investments (551) (388)
Proceeds from sale of assets -- 759
------- -------
Net cash used in investing activities (9,313) (79,654)
------- -------
Cash flows from financing activities:
Proceeds from sales of common stock -- 652
Proceeds from senior secured notes -- 75,000
Proceeds from issuance of preferred stock -- 25,000
Proceeds from exercise of warrants and options 331 1,184
Loan proceeds -- 3,316
Payment of long-term debt (450) (8,965)
Payment of note payable -- (2,100)
Stock/note issuance costs and other (205) (9,328)
------ -------
Net cash provided by (used in) financing
activities (324) 84,759
------ -------
Net increase (decrease) in cash and cash equivalents (10,583) 4,594
Cash and cash equivalents at beginning of period 21,952 113
------- ------
Cash and cash equivalents at end of period $ 11,369 $ 4,707
======== ======
The accompanying notes are an integral part of these financial statements.
</PAGE>
XCL Ltd. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(1) Basis of Presentation
The consolidated financial statements at June 30, 1998, and
for the six months then ended have been prepared by the Company,
without audit, pursuant to the Rules and Regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such Rules
and Regulations. The Company believes that the disclosures are
adequate to make the information presented herein not misleading.
These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of XCL Ltd.
and subsidiaries as of June 30, 1998, and 1997, and the results
of their operations for the six months ended June 30, 1998 and
1997, have been included. Certain reclassifications have been
made to prior period financial statements to conform to current
year presentation. These reclassifications had no effect on net
loss or shareholders' equity. The results of the Company's
operations for such interim periods are not necessarily
indicative of the results for the full year.
Revenues and operating expenses associated with oil and gas
properties held for sale have become insignificant and
accordingly, are recorded in other costs and operating expenses
in the accompanying consolidated statements of operations.
(2) Liquidity and Capital Resources
The Company, since its decision in 1995 to dispose of its
domestic properties, has generated minimal annual revenues and is
now devoting all of its efforts toward the development of its
China properties. Although the Company has cash available in the
amount of approximately $16.6 million at June 30, 1998 (including
restricted cash of approximately $5.2 million to pay interest due
November 1, 1998) and a positive working capital position,
additional funds will be needed to meet the Company's working
capital requirements and capital expenditure obligations until
sufficient cash flows are generated from anticipated production
to sustain its operations and to fund future development
obligations.
Management plans to generate the additional cash needed
through the sale or financing of its domestic oil and gas
properties assets held for sale and investment in land 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 oil and gas properties held
for sale or investment in land 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 cash flow will be available to
partially satisfy its cash requirements. However, there is
likewise no assurance that such development will be successful
and production will commence as anticipated, and that such cash
flow will be available or sufficient.
(3) Supplemental Cash Flow Information
There were no income taxes paid during the six months
periods ended June 30, 1998 and 1997.
Capitalized interest for the six months ended June 30, 1998
was $5.5 million as compared to $2.6 million for the same period
in 1997. Interest paid during the six months ended June 30, 1998
amounted to $5.8 million as compared to $195,300 for the same
period in 1997.
On May 1, 1998, an interest payment in the amount of $5.3
million was made to the holders of the senior secured notes for
the interest period November 1, 1997 through May 1, 1998.
(4) Debt
As of June 30, 1998, long-term debt consists of the following
(000's):
Senior secured notes, net of unamortized discount
of $12,616 $ 62,384
Lutcher Moore Group Limited Recourse Debt 2,074
--------
64,458
Less current maturities:
Lutcher Moore Group Limited Recourse Debt (2,074)
--------
$ 62,384
========
Substantially all of the Company's assets collateralize
these borrowings.
(5) Investment in Land
The Lutcher Moore Tract previously included in oil and gas
properties held for sale has been reclassified to investment in
land in the accompanying consolidated balance sheet because the
Company is exploring alternative plans.
(6) Preferred Stock and Common Stock
As of June 30, 1998, the Company had the following shares of
Preferred Stock issued and outstanding:
1998 Dividends (In Thousands)
Liquidation -----------------------------
Shares Value Declared Accrued Total
--------- ------------ -------- ------- -----
Amended Series A 1,181,614 $ 100,437,190 $ -- $ 1,611 $ 1,611
Amended Series B 48,405 4,840,500 -- -- --
--------- ----------- ----- ------- ------
1,230,019 $ 105,277,690 $ -- $ 1,611 $ 1,611
========= =========== ===== ======= ======
Amended Series A Preferred Stock
- --------------------------------
On May 1, 1998, the Company issued an aggregate of 52,161
shares of Amended Series A Preferred Stock in payment of $4.5
million in dividends payable on that date.
Amended Series B Preferred Stock
- --------------------------------
On June 30, 1998, the Company issued an aggregate of 1,320
shares of Amended Series B Preferred Stock in payment of $0.1
million in dividends payable on that date.
Loss Per Share
- --------------
The following table sets forth the computation of basic and
diluted loss per common share (as adjusted for a one-for-fifteen
reverse stock split effected December 17, 1997).
(In thousands, except per share data)
For the Six Months Ended
June 30,
------------------------
1998 1997
---- ----
Weighted average number of common shares
outstanding (basic): 22,622 19,511
Weighted average number of common shares
outstanding (diluted): 22,622 19,511
Net loss applicable to common stock $ (8,999) $ (5,742)
Basic loss per share $ (.40) $ (.29)
Diluted loss per share $ (.40) $ (.29)
The effect of 34,627,207 and 24,046,901 shares of potential
common stock were anti-dilutive in the six months ended June 30,
1998 and 1997, respectively, due to the losses in both periods.
(7) 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 (the "Agreement") with CNODC in
February 1993. Under the terms of the 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 Agreement includes the following additional
principal terms:
The 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 Company and its partner as a
group (the "Contractor"). 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
Agreement. 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 Agreement 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 Agreement). 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 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.
(8) XCL-China Ltd.
The following summary financial information of XCL-China
Ltd., a wholly owned subsidiary, reflects its financial position
and its results of operations for the periods presented (in
thousands of dollars):
June 30,
1998
A S S E T S -----
-----------
Current assets $ 188
Oil and gas properties (full cost method):
Proved undeveloped properties, not being amortized 26,954
Unevaluated properties 40,875
------
67,829
------
Other assets 597
------
$ 68,614
======
L I A B I L I T I E S A N D A C C U M U L A T E D D E F I C I T
- ------------------------------------------------------------------
Total current liabilities $ 5,202
Due to parent 65,960
Accumulated deficit (2,548)
-------
$ 68,614
=======
Six Months Ended
June 30,
-----------------
1998 1997
---- ----
Costs and operating expenses $ 618 $ 599
----- -----
Net loss $ (618) $ (599)
===== =====
<PAGE>
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 substantial 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.
/S/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
April 10, 1998
</PAGE>
XCL-China Ltd.
BALANCE SHEETS
(Thousands of Dollars)
- --------------
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 undeveloped properties, 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 $ 285 $ 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.
<PAGE>
XCL-China, Ltd.
STATEMENTS 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.
<PAGE>
XCL-China
STATEMENTS 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.
<PAGE>
XCL-China, Ltd.
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31
---------------------------
1997 1996 1995
---- ---- ----
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 $ -- $ -- $ --
====== ===== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
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):
Year Ended December 31
--------------------------------------
1994
Total 1997 1996 1995 and Prior
----- ---- ---- ---- ---------
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
======= ======= ====== ====== ======
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 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 FASB No. 69 is summarized below, and does not
purport to present the fair market value of the Company's oil and
gas assets, but does present the present value of estimated
future cash flows that would result under the assumptions used.:
The Company previously excluded from this table, the effect of
income taxes because it believed it had a tax holiday in China.
Subsequent to December 31, 1997, the Company determined that it
would be subject to future income taxes at the maximum rate of
33% in China. Accordingly, the table below has been revised to
include estimates of such income taxes.
Year Ended December 31
--------------------
1997 1996
---- ----
(Thousands of Dollars)
Future cash inflows $ 205,765 $ 222,797
Future costs:
Production, including taxes (45,623) (39,033)
Development (41,093) (40,904)
------- -------
Future net inflows before income taxes 119,049 142,860
Future income taxes (1) (22,916) (35,658)
------- --------
Future net cash flows 96,133 107,202
10% discount factor (42,285) (44,596)
Transfer of properties to assets held for sale -- --
------- --------
Standardized measure of discounted net cash flows $ 53,848 $ 62,606
======= =======
- -------------------
(1) Future income taxws are computed by applying the maximum tax rate in China
applicable to foreign-funded enterprises of 33%.
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 $ 62,606 $ --
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 (219) --
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 -- --
Net change in income taxes 7,857 (16,456)
------ -------
Standardized measure-end of year $ 53,848 $ 62,606
====== =======
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.
=================================================================
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
Private Placement
The Exchange Offer
Use of Proceeds
Financial Restructuring
Capitalization
Price Range of Common Stock
Dividend Policy
Oil and Gas Exploration and Production
Properties and Reserves
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business
Management
Security Ownership of Certain Beneficial
Owners and Management
Description of the Notes
Description of Capital Stock
Material Federal Income Tax Considerations
Book Entry -- Delivery and Form
Plan of Distribution
Transfer Restrictions on the Old Notes
Legal Matters
Experts
Engineers
Glossary of Terms
Index to Financial Statements
[LOGO]
XCL Ltd.
$75,000,000
13.50% Senior Secured
Notes due May 1, 2004
_____________________________
Prospectus
_____________________________
___________, 1998
===========================================================================
PART II
Information Not Required in the Prospectus
------------------------------------------
Item 20. 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
(i) 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 of 1933 (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 21. 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)
4.40 Form of Stock Purchase Warrant dated effective as of
June 30, 1998, issued to Mr. Patrick B. Collins with
respect to 17,000 warrants to purchase shares of Common
Stock of the Company at an exercise price of $3.75 per
share, issued as partial compensation pursuant to a
Consulting Agreement. (V)(i)
4.41 Form of Warrant Exchange Agreement and Stock Purchase
Warrant dated September 15, 1998 to purchase an
aggregate of 351,015 shares of Common Stock at an
exercise price of $2.50 per share, subject to
adjustment, issued to Cumberland Partners in exchange
for certain warrants held by Cumberland Partners.
(V)(ii)
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:
Date Purchaser Principal Purchase
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)
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, wherein 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)
10.49 Form of Consulting Agreement dated June 15, 1998,
between the Company and Mr. Patrick B. Collins, whereby
Mr. Collins performs certain accounting advisory
services. (V)(iii)
10.50 Amended and Restated Long Term Stock Incentive Plan
effective June 1, 1997 (U)(i)
10.51 Form of Restricted Stock Award Agreement. (V)(iv)
10.52 Form of Nonqualified Stock Option Agreement. (V)(v)
10.53 Appreciation Option for M. W. Miller, Jr. (U)(ii).
10.54 Zhang Dong Petroleum Sharing Contract. (V)(vi)
21.1 Subsidiaries of the Company
XCL-China Ltd.
XCL-China LubeOil Ltd.
XCL-China Coal Methane Ltd.
XCL-Cathay Ltd.
XCL-Texas, Inc.
XCL-Acquisitions, Inc.
The Exploration Company of Louisiana, Inc.
XCL Land Ltd.
23.1 Consent of PricewaterhouseCoopers LLP *
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 (W)
25.1 Statement of Eligibility of State Street Bank and Trust
Company, Successor Trustee to Fleet National Bank.
99.1 Reserve Report dated January 1, 1998, prepared by
H.J. Gruy and Associates, Inc. (X)
_________________________
* 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 10-
K 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; and (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.
(T) Incorporated by reference to the Registration Statement
on Form S-1 filed May 6, 1998, where it appears as (i)
Exhibit 23.1 and Exhibit 23.2, respectively.
(U) Incorporated by reference to Proxy Statement dated
November 20, 1997 filed November 6, 1997, where it appears
as (i) Appendix C; and (ii) Appendix D, respective.
(V) Incorporated by reference to Amendment No. 2 to
Registration Statement on Form S-1 filed October 23, 1998;
where it appears as (i) Exhibit 4.40; (ii) Exhibit 4.41;
(iii) Exhibit 10.49; (iv) Exhibit 10.51; (v) Exhibit 10.52;
and (vi) Exhibit 10.54.
(W) Incorporated by reference to Registration Statement on
Form S-4 filed May 6, 1998. where it appears as Exhibit
24.1.
(X) Incorporated by reference to Amendment No. 2 to the
Annual Report on Form 10-K for the year ended December 31,
1997, filed on October 23, 1998, where it appears as Exhibit
Item 22. Undertakings
The undersigned co-registrants hereby undertake that,
for purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement will be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of each undersigned co-registrants
pursuant to the provisions described under Item 15 above, or
otherwise, each undersigned co-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 an undersigned co-registrant of expenses
incurred or paid by a director, officer or controlling person of
such undersigned co-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, such undersigned co-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.
Each undersigned co-registrant hereby undertakes to
respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Item 4, 10(b), 11, or
13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request.
Each undersigned co-registrant hereby undertakes to
supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
Registration Statement when it became effective.
Each undersigned co-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 price 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 of any of the securities being
registered which remain unsold at the termination of the
offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, each of the Company and XCL-China has duly caused this
Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by of the undersigned, respectively,
thereunto duly authorized, in the City of Lafayette, State of
Louisiana on the 23rd day of October, 1998.
XCL LTD.
/s/ Marsden W. Miller, Jr.
By:_____________________________
Marsden W. Miller, Jr.
Chairman of the Board and
Chief Executive Officer
XCL-CHINA LTD.
/s/ John T. Chandler
By:____________________________
John T. Chandler
Chairman and
Chief Executive Officer
XCL LTD.
Pursuant to the requirements of the Securities Act of 1933,
this Amendment No. 1 to the Registration Statement on Form S-4
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) and Acting
Chief Financial Officer
(principal financial and
accounting officer) October 23, 1998
/s/ John T. Chandler
- ------------------------
John T. Chandler Vice Chairman of the Board October 23, 1998
/s/ Benjamin B. Blanchet
- ------------------------
Benjamin B. Blanchet Executive Vice President
and Director October 23, 1998
/s/ R. Thomas Fetters, Jr. *
____________________________
R. Thomas Fetters, Jr. Director October 23, 1998
/s/ Fred Hofheinz*
- ----------------------------
Fred Hofheinz Director October 23, 1998
/s/ Francis J. Reinhardt, Jr. *
- ------------------------------
Francis J. Reinhardt, Jr. Director October 23, 1998
/s/ Arthur W. Hummel, Jr. *
- -----------------------------
Arthur W. Hummel, Jr. Director October 23, 1998
/s/ Michael Palliser*
- -------------------------
Sir Michael Palliser Director October 23, 1998
- --------------------------
Peter F. Ross Director ------------, 1998
- -------------
* By Benjamin B. Blanchet, Attorney In Fact
XCL-CHINA LTD.
Pursuant to the requirements of the Securities Act of 1933,
this Amendment No. 1 to the Registration Statement on Form S-4
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. Acting Chief Financial Officer
(principal financial and
accounting officer) October 23, 1998
/s/ John T. Chandler
- ----------------------
John T. Chandler Chairman and Chief Executive
Officer October 23, 1998
/s/ Benjamin B. Blanchet
__________________________
Benjamin B. Blanchet Vice President and Director October 23, 1998
- ---------------
* By Benjamin B. Blanchet, Attorney In Fact
CONSENT OF INDEPENDENT ACCOUNTANTS
October 20, 1998
We consent to the inclusion in this registration statement
on Form S-4 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
references to our firm under the captions "Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
The Board of Directors
XCL, Ltd.
110 Rue Jean Lafitte
Lafayette LA 70508
Gentlemen:
We hereby consent to the use of the name H.J. Gruy and Associates,
Inc. and references to H.J. Gruy and Associates, Inc. and to the
references to our report dated October 12, 1998 (Proved Reserves,
Zhao Dong Block, China) prepared for XCL Ltd. in the filing of
Amendment No. 1 to the Registration Statement on Form S-4 of
XCL Ltd.
Yours very truly,
/s/ James H. Hartsock
-----------------------------
By: James H.Hartsock, PhD, PE
Title: Executive Vice President
Houston, Texas
October 12, 1998
H.J. Gruy and Associates, Inc. 1200 Smith Street, Suite 3040,
Houston, Texas 77002 o (713) 739-1000
