UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
Quarterly Report pursuant to Section 13 or 15(d)
of the
[X] Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
OR
Transition Report Pursuant to Section 13 or 15(d)
of
[ ] the Securities Exchange Act of 1934
Commission File No. 1-10669
XCL Ltd.
(Exact name of registrant as specified in its charter)
Delaware 51-0305643
(State of Incorporation) (I.R.S.
Employer
Identification Number)
110 Rue Jean Lafitte, Lafayette, LA 70508
(Address of principal executive offices) (Zip
Code)
318-237-0325
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
22,995,804 shares Common Stock, $.01 par value were
outstanding on August 14, 1998.
XCL LTD. AND SUBSIDIARIES
June 30, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Statement Pursuant to Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995.
This report contains "forward-looking statements"
within the meaning of the federal securities laws. These forward-
looking statements include, among others, statements concerning
the Company's outlook for 1998 and beyond, the Company's
expectations as to funding its capital expenditures and other
statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning
matters that are not historical facts. The forward-looking
statements in this report are subject to risks and uncertainties
that could cause actual results to differ materially from those
expressed in or implied by the statements.
Liquidity and Capital Resources
The Company has only generated minimal annual revenues
since the fourth quarter of 1995, when management made the
decision to focus its attention on operations in China and to
sell its other assets, and has had a loss for each of the last
five fiscal years. The Company's decision to focus on operations
in China is supported by the excellent well test results on the
China properties, however, the Company has not generated any
profits from its operations in China and is in the development
stage with respect to such operations. Although drilling results
and well tests have been excellent, initial production is not
expected until the first half of 1999.
As of June 30, 1998, the Company had an operating cash
balance of $11.4 million and $5.2 million in a restricted escrow
account for payment of interest on the outstanding senior secured
notes through November 1, 1998. 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 through 1999. However, the Company
believes that it will be able to obtain the funds necessary to
cover its working capital and capital expenditure requirements.
Potential sources of funds include the sale and/or
refinancing of domestic oil and gas properties held for sale 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 and joint ventures with other oil companies.
Additionally, the Company believes, based on discussions with the
Chinese authorities during the last several months, that it may
acquire interests in additional oil and gas exploration and
development blocks in China, on which successful exploration
wells have been drilled by the Chinese, which could enhance the
Company's ability to timely obtain adequate funds for its
obligations in China. 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 no 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 senior secured notes and there is no assurance that
such approval could be obtained.
The Company, Apache, and CNODC are working together to
reduce capital costs and to determine whether commencement of
production from the C-4 Well area on the Zhao Dong Block can
begin by the first half of 1999. All three parties have agreed
to make every effort to achieve initial production in this time
frame.
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
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 believes that both the lubricating oil and
coalbed methane projects will be successful and grow. If
successful, the Company may make additional investments in these
businesses, the timing and amount of which are unknown at this
time.
Other
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.
Inflation has had no material impact during the
reporting periods, however, oil and gas exploration activity has
increased 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, based on present conditions, 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. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which is effective for the Company's year ended
December 31, 1998. This statement establishes standards for
reporting of information about operating segments. The Company
will be analyzing SFAS No. 131 during 1998 to determine what, if
any, additional disclosures will be required.
Results of Operations
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 three and six
months ended June 30, 1998, when compared with the same periods
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 three and six months ended June
30, 1998 and 1997 was $0.3 million and $0.7 million,
respectively, and resulted from the short-term investment of cash
still available from the May 1997 debt and equity offerings.
General and administrative expenses were $1.3 million
and $2.9 million for the three and six months ended June 30,
1998, as compared to $0.7 million and $1.6 million for the same
periods 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.
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.
SIGNATURES
Pursuant to the requirements of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
XCL LTD.
By:___________________________
Name:_________________________
Title:__________________________
Date: _________________________, 1998
