_______________________________________________________________________
Securities and Exchange Commission
Washington, DC 20549
___________________________
FORM 10-K
___________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to
__________________
Commission file number 1-10669
_____________________________
XCL Ltd.
(Exact name of registrant as specified in its charter)
_____________________________
Delaware 51-0305643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508
(Address of principal executive offices) (Zip Code)
_____________________________
(Registrant's telephone number, including area code) 318-237-0325
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value American Stock Exchange
- ---------------------------- -----------------------
Title of each class Name on each exchange
on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by
nonaffiliates of the registrant on April 13, 1998, was approximately
$92.8 million.
22,341,636 shares Common Stock, $.01 par value were outstanding on
April 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
None
_______________________________________________________________________
TABLE OF CONTENTS
PART I
Item 1. and Item 2. Business and Properties
General
The Zhao Dong Block
United/XCL Lube Oil JointVenture
Coalbed Methane Project
Domestic Properties
Oil and Gas Reserves
Production, Sales and Cost Data
Oil and Gas Acreage
Drilling Activity
Producing Well Data
Title to Properties
Markets
Competition
Certain Risk Factors Relating to the Company and the Oil and Gas
Industry
Employees
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplemental Data
XCL Ltd. and Subsidiaries
XCL-China, Ltd.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Other Matters
Signatures
Glossary of Terms
<PAGE>
PART I
This Annual Report includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
All statements other than statements of historical facts included
in this Annual Report, including, without limitation, those
regarding the Company's financial position, business strategy,
budgets, reserve estimates, development and exploitation
opportunities and projects, behind-pipe zones, classification of
reserves, projected financial, operating and reserve data and
plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in "Certain
Risk Factors Relating to the Company and the Oil and Gas
Industry," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual
Report including, without limitation, in conjunction with the
forward-looking statements included in this Annual Report. All
subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on behalf of the
Company, are expressly qualified in their entirety by the
Cautionary Statements.
Item 1. and Item 2. Business and Properties.
- ----------------------------------------------
See the Glossary of Terms attached hereto for definitions of
certain commonly used industry terms. The Company operates
through several wholly owned subsidiaries. Accordingly, all
references herein to the Company or XCL include such
subsidiaries.
General
- -------
XCL Ltd. (together with its consolidated subsidiaries, the
"Company" or "XCL") is engaged principally in the exploration for
and the development and production of crude oil and natural gas.
Its exploration and development efforts are, at this time,
focused primarily on the Zhao Dong Block in the shallow-water sea
area of Bohai Bay in The People's Republic of China ("China").
XCL's activities on the Zhao Dong Block have been undertaken
pursuant to an exploration and production joint venture with
China National Oil and Gas Exploration and Development
Corporation, a Chinese governmental agency ("CNODC") effective
May 1, 1993. In March 1994, the Company farmed out a one-third
interest in the Foreign Contractor's (as defined) interest,
subsequently increased to 50%, to Apache Corporation ("Apache").
See "The Zhao Dong Block" commencing at page [4] for a
description in greater detail of the Company's business and its
interest in the Zhao Dong Block. Based on the initial success of
its first project in China, the Company's growth strategy is to
expand its participation in the Chinese energy industry by
continuing to explore and develop the Zhao Dong Block and by
selectively entering into additional energy related joint
ventures. This strategy is the result of the Company's opinion
that China (i) has extensive undeveloped energy resources, (ii)
is experiencing and will continue for the foreseeable future to
experience high growth in demand for energy and (iii) has a
policy of encouraging foreign participation in the development of
its energy resources. The Company believes, as evidenced by its
own experience in China, that Chinese policy offers opportunity
for participation by independent oil and gas companies in the
development of the Chinese energy business. Additionally, the
Company believes, because of its early success in China, that it
has an excellent relationship with the Chinese authorities in
charge of the development of China's energy resources and that
the Company can, therefore, be competitive in China.
In furtherance of the Company's objective of expanding its
involvement in the Chinese energy business and developing its
relationships with the Chinese authorities responsible for the
development of China's energy resources, 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" on page [11]. The Company's
required capital contribution to the joint venture has been made
and the Company is not obligated to expend further amounts.
However, the Company believes, based on CNPC's plans for and
strong support of the lubrication oil joint venture, that the
joint venture business will grow and that the Company will make
additional investments in the joint venture. Also, 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 began cooperative exploration and
development of coalbed methane in two areas in China. See
"Coalbed Methane Project" on page 12. The venture is not
currently active.
Before 1993, the Company operated primarily onshore in the
Gulf Coast area of the United States. Since it decided in late
1995 to focus on operations in China, the Company has sold or is
in the process of selling its other assets. XCL Ltd., formerly
The Exploration Company of Louisiana, Inc., was incorporated in
Delaware in 1987. It is the successor to a Louisiana corporation
of the same name which was incorporated in 1981.
The Zhao Dong Block
- -------------------
Geology
-------
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 kilometers
(roughly 50,000 gross acres). The Company believes 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
published statistics, Dagang has produced over 700 million
barrels of oil and has an estimated ultimate recovery of more
than one billion barrels.
Tertiary formations constitute a major portion of the Zhao
Dong Block's potential. Its geology is 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, subsurface
data and drilling results from the nine wells the Company has
drilled on the Zhao Dong Block 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 suggests 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 kilometers and cost
approximately $5.5 million; the Company's share was approximately
$2.75 million. A similar program (at a comparable cost) will be
undertaken in 1998 to cover most of the rest of the 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 is planned for 1998 to delineate the extent of
the 1997 C-4 discovery located northeast of the C-D Field. The C-
4 well is productive from the Shahejie Formation and,
additionally, from Jurassic and Permian Age sediments.
The Company's drilling programs, year by year, have been as
follows:
1994 Drilling
-------------
Zhao Dong C-1. The first of three Phase 1 exploratory wells,
C-1 was spudded in April 1994, and drilled to a depth of 9,843
feet. Oil was tested in two Pliocene sands of the Lower
Minghuazhen Formation, from perforations between 4,278 and 4,462
feet, and a combined test rate of 2,160 BOPD with no water was
realized. 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, and although the well was drilled on the
edge of the shallow structure, 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 of gas; 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 kms. northeast of
the C-1, and was drilled to a depth of 8,993 feet. Eight zones
tested at a combined rate of 15,349 BOPD, 6,107 Mcfpd of gas, and
14 barrels of condensate per day. Total net pay for the zones
tested was 209 feet.
The C-4 proved the presence and productivity of multiple
Oligocene Age Shahejie sands on the 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.
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
to appraise the C-4 discovery and four exploratory wells, at
least two of which will be in the "C" and "D" segments.
Development Plans
-----------------
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, has been approved by
CNPC subject to certain modifications that XCL and Apache are
studying, and has been approved by the State Planning Commission.
CNODC has given notice that it will participate as to its full
51% share in the C-D Field.
XCL, Apache and CNODC are currently collaborating on
engineering studies to refine the ODP, both to reduce capital
commitments for development and to accelerate production. It is
expected that these studies will assist the parties in
determining the most efficient method for development, including
the practicability of beginning production before all development
operations have been completed. The Company has been informed by
CNODC that they desire that production on the Zhao Dong Block
begin in 1998 and the parties are assessing how and whether that
would be commercially feasible. Initial results indicate that
1998 production is possible and the Company, Apache and CNODC
have decided to attempt to commence initial production in 1998.
XCL's current estimate (which is subject to revision as the
project moves forward) of the costs to develop the reserves in
the C-D Field that are identified in the ODP by the Operator
(which are higher than XCL's reserves) is approximately $185
million (of which XCL's share would be approximately $45.3
million). This is less than amounts projected earlier by the
Operator in the original ODP in part because of the initial
inclusion in the ODP estimates of large contingencies, which all
parties believe are too high. In addition, cost reductions are
expected in part based on design changes that would eliminate one
drilling platform and one production platform from the ODP.
While formal Chinese approval for these changes has not yet been
obtained, all parties believe that such approval can be secured.
Further, cost reductions are expected as a result of preliminary
bids that suggest that cost estimates in the ODP have been too
high. Cost reductions from the Operator's projections are also
based on the assumption that if the project moves forward with
dispatch, the current weakness of certain Asian currencies could
result in substantial reductions in the costs of steel and
fabrication for the project.
The revised ODP design anticipates that once production and
loading facilities have been installed in the field, wells will
be placed on production as they are drilled. In this case, cash
flow from this production would be available to fund part of
XCL's capital requirements for the development of the C-D Field.
The Company's financial plans include the use of such cash flow
as part of the Company's source of funds.
Production tests of the C-4 Well, announced by XCL on
October 7, 1997, indicate a combined daily rate from 8 zones of
15,359 barrels per day, and 6,107 Mcf of gas, plus a ninth zone
daily rate of 4,600 Mcf and 14 barrels of condensate. This well
suggests a new field discovery on the Zhao Dong Block. CNODC,
XCL, and Apache have agreed to drill a well early in 1998 to
appraise the C-4 Well. If this proves successful, early
production from the two initial wells in the C-4 Well area may
begin in late 1998; initial feasibility studies indicate that
this is possible. The capital costs attributable to such early
production are not included in the 1998 work program and budget.
Successful appraisal of the C-4 Well could also cause XCL and
Apache to move promptly toward development of this area.
The 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 commercial production for that field.
Exploration Period
------------------
Work performed and expenses incurred during this period,
consisting of three phases totaling seven contract years and
beginning as of May 1, 1993, are the exclusive responsibility of
the Foreign Contractor. The Contract mandates certain minimal
requirements for drilling, seismic and expenditures during each
phase of the Exploration Period. The Foreign Contractor has
elected to enter the third exploration phase (expiring April 30,
2000). The Foreign Contractor is required to drill exploratory
wells prior to the expiration of the Exploration Period. The
minimum work requirements for seismic and the minimum
expenditures for the balance of the Contract have been met.
Development Period
------------------
The Development Period for any field discovered during the
Exploration Period commences on the date the requisite Chinese
governmental authority approves the development plan for an oil
and/or gas field. The C-D Field is now in the Development
Period.
Production Period
-----------------
The Production Period for any oil and/or gas field covered
by the Contract (the "Contract Area") will be 15 consecutive
years (each of 12 months), commencing for each such field on the
date of commencement of commercial production (as determined
under the terms of the Contract). However, prior to the
Production Period, and during the Development Period, oil and/or
gas may be produced and sold during a long-term testing period.
Relinquishment
--------------
The Company expects that no relinquishment will be required
until Exploration Phase 3 has been concluded. After April 30,
2000, the portions of the Contract area, not including areas in
which development and/or production activities have been
undertaken, must be relinquished.
Termination of the Contract
---------------------------
The Contract may be terminated by the Foreign Contractor at
the end of each phase of the Exploration Period, without further
obligation. The parties have elected to go into the third phase
of the Exploration Period.
Post-Production Operating and Exploration Costs
-----------------------------------------------
After commercial production has begun, the operating costs
incurred in any given calendar year for an oil field shall be
recovered in kind from 60% of that year's oil production. After
recovery of operating costs, the 60% is applied to exploration
costs. Unrecovered operating and exploration 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% per annum.
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 the
four Carried Wells. All of these wells have been drilled and
tested with the exception of the F-1 Well, drilling operations on
which have been abandoned. The Company does not believe that such
operations on the F-1 Well to date satisfy Apache's obligations
to deliver a fourth Carried Well. The amounts advanced by Apache
for the Company's share of the Carried Wells are recoverable from
a portion of the Company's share of cost recovery revenues from
the 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. In
addition, each party has the option to purchase the other party's
interest in the Contract upon the occurrence of certain "option
events." Option events include the failure more than twice in one
year to pay sums due under the Operating Agreement, after
receiving written notice of default and failing to cure within
any applicable cure period provided by the Operating Agreement
(if nonpayment is the subject of dispute and arbitration under
the Operating Agreement, it does not constitute a "failure to
pay" until an arbitral decision is rendered against the
nonpayor), the inability of a party to pay its debts as they fall
due or a final unappealable order by a court of competent
jurisdiction liquidating the party or appointing a receiver to
take possession of all of the party's assets, the transfer of
more than 49% of the voting shares of the Apache subsidiary
holding Apache's interest in the 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 in 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 Memorandum of
Understanding with CNACG to develop a contract for exploration,
development and utilization of coalbed methane in the two areas.
The March 31, 1995 agreement expired by its terms on December 31,
1996; however, the Company has been informally advised that CNACG
will extend the term of the agreement.
Domestic Properties
- -------------------
U.S. Exploration and Production Activities. The Company has
sold substantially all of its U.S. producing properties except
for an interest in the Berry R. Cox Field (the "Cox Field") in
South Texas and is seeking to sell or joint venture its interest
in that property. 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). 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.
Lutcher Moore Tract. The Company holds, in partnership with
one of its subsidiaries, a fee interest in a 62,500 acre
undeveloped tract of Louisiana fee property located in Ascension,
St. James and St. John the Baptist Parishes, Louisiana (the
"Lutcher Moore Tract"). Expressions of interest to purchase the
property have been received from several parties and the Company
is presently evaluating such proposals with the intent to sell
the property. The Company is also evaluating the possibility of
developing the property into a source of wetland mitigation
credits. In connection with the acquisition of the Lutcher Moore
Tract, the Company's indirect ownership of such tract is subject
to a first mortgage, with a current principal balance of
approximately $2.0 million, and a number of sellers' notes, with
an aggregate current principal balance of approximately $0.5
million (collectively, the "Lutcher Moore Debt"). Recourse by the
holder of the first mortgage and the holders of the sellers'
notes is limited to the Lutcher Moore Tract, with neither the
Company nor its wholly-owned subsidiaries, XCL-Land Ltd. and The
Exploration Company of Louisiana, Inc., liable for the debt.
Oil and Gas Reserves
- --------------------
Based on the wells drilled to date, the Company's
independent engineering firm, H.J. Gruy and Associates, Inc.
("Gruy"), has projected gross proved undeveloped reserves for
the segments of the C-D Field drilled to date of 46.26 million
barrels of recoverable oil. CNODC has exercised its option to
pay 51% of all development costs and receive 51% of oil
production. Consequently, the Company's net interest in such
proved undeveloped reserves is estimated to be approximately
11.76 million barrels of oil with a PV-10 of $62.5 million as of
January 1, 1998. The Company believes that the C-D Field and the
remainder of the Zhao Dong Block hold the potential for
additional significant increases in oil reserves. See "Certain
Risk Factors Relating to the Oil and Gas Industry -- Reliance on
Estimates of Proved Reserves and Future Net Revenues."
Production, Sales and Cost Data
- -------------------------------
The following table sets forth certain information regarding
the production volumes, revenues, average prices received and
average production costs associated with the Company's sale of
oil and gas from properties held for sale for the periods
indicated.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Net Production: (a)
Gas (MMcf)...... 72 467 1,474
Oil (MBbl)...... 4 9 19
Gas equivalent (MMcfe) 95 522 1,588
Oil and gas sales ($ in 000's)(b)
Gas.................... $ 166 $ 955 $ 1,953
Oil and other.......... 70 181 527
----- ----- ------
Total oil and gas sales $ 236 $1,136 $ 2,480
===== ===== ======
Average sales price:
Gas ($ per Mcf).......... 2.28 1.84 1.33
Oil ($ per Bbl).......... 18.34 19.80 19.58
Gas equivalent ($ per Mcfe) 2.47 2.18 1.56
Oil and gas costs ($ per Mcfe):
Production expenses and taxes 2.41 0.74 0.71
Depreciation, depletion and
amortization of oil and gas
properties 0.81 0.96 1.23
________________
(a) Excludes gas consumed in operations.
(b) Includes plant products recovered from treating and
processing operations.
The following table shows the 1997 production of oil and
natural gas liquids and natural gas by major fields. All of the
Company's net production was attributable to the Cox Field and
the Frenier Field (on the Lutcher Moore Tract).
1997 Net Production
-------------------
(MBbls) (MMcf)
------ -------
Field Oil % Gas %
- ----- --- --- --- ---
Cox Field...................... -- -- 72 100
Frenier Field.................. 4 100 -- --
Oil and Gas Acreage
- -------------------
The oil and gas acreage in which the Company has leasehold
or other contractual interest at December 31, 1997, and which are
not classified as assets held for sale are summarized in the
following table. "Gross" acres are the total number of acres
subject to the Contract. "Net" acres are gross acres multiplied
by the Company's fractional share of the costs of production
before CNODC's reversionary interest.
Undeveloped
----------------
Gross Net
----- ------
The People's Republic of China 48,677 24,338
Drilling Activity
- -----------------
The following tables set forth wells drilled by the Company
in the periods indicated.
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
United States Gross Net Gross Net Gross Net
- ------------- ----- --- ----- --- ----- ---
Exploratory:
Productive -- -- -- -- -- --
Nonproductive -- -- -- -- -- --
----- ---- ---- --- ---- ---
Total -- -- -- -- -- --
Development:
Productive -- -- -- -- 1 .2
Nonproductive -- -- -- -- -- --
----- ---- ---- ---- ---- ----
Total -- -- -- -- 1 .2
Year Ended December 31,
1997 1996 1995 (a)
----------- ----------- -------------
The People's Republic of China Gross Net Gross Net Gross Net
- ------------------------------ ----- --- ----- --- ----- ---
Exploratory:
Productive 2 1.0 1 .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.
Title to Properties
- -------------------
The Company believes that title to its properties is
generally acceptable in accordance with prevailing standards in
the oil and gas industry, subject to exceptions which do not
materially detract from the value of such properties. The
Company's properties are subject to royalty, overriding royalty,
carried and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens incident to
operating agreements, to liens for current taxes not yet due and
other relatively minor encumbrances.
The Company's stock of its major subsidiary, XCL-China, has
been pledged to the holders of the Company's 13.5% Senior Secured
Notes due May 1, 2004 (the "Notes"). Under the Participation
Agreement between the Company and Apache, each of the Company and
Apache has a right of first refusal with respect to (i) any sale
or transfer of interest in the Foreign Contractor's share of the
Contract and (ii) any sale of 50% or more of the outstanding
voting capital stock of the other's subsidiary party to the
Contract and the Participation Agreement. Absent a waiver from
Apache, foreclosure on the shares of XCL-China pledged to secure
the Notes could trigger one of these rights.
Markets
- --------
Substantially all of the Company's 1997 gas production from
the Cox Field was dedicated to MidCon Texas Pipeline Corp. under
contracts dated May 1, 1991, as amended.
With respect to China, under the terms of the Contract, the
Company has both the right and obligation in each calendar
quarter to take and separately dispose of its share of oil
produced at the Zhao Dong Block. However, the Company shall not
deliver its oil to prohibited destinations, which are those that
infringe on the political interests of China. During 1994, China
became a net importer of oil, therefore the Company believes it
can sell its share of oil produced in China at world market
prices. Additionally, the oil to be produced from the C-D Field
area is ideally suited for lubrication oil feed stock. The
Company's lubrication oil joint venture gives the Company certain
rights to market lubrication oil and lubrication oil feed stock
within and without China. Through the lubrication joint venture
the Company expects to receive a premium for its share of the oil
produced from the C-D Field.
Competition
- -----------
The oil and gas industry is competitive in all phases, both
domestic and internationally. In pursuing its growth strategy of
expanding its participation in the Chinese energy industry, the
Company is in competition with the "major" integrated oil
companies, national oil companies and other independent oil
companies. Although many of these competitors have financial
resources greater than those of the Company, management believes,
based upon its accomplishments to date, that the Company is
positioned to continue to compete effectively.
Certain Risk Factors Relating to the Company and the Oil and Gas
Industry
- ----------------------------------------------------------------
General Industry Risks
----------------------
The Company's business is affected by the general risks
associated with the oil and gas industry. The availability of a
ready market for oil and gas purchased, sold and produced by the
Company depends upon numerous factors beyond its control, the
exact effects of which cannot be accurately predicted.
Generally, these factors include, among other things, the level
of production and economic activity, the availability of oil and
gas supplies, action taken by oil-producing nations, the
availability of transportation capacity, the availability and
marketing of other competitive fuels, fluctuating and seasonal
demand for oil, gas and refined products and the extent of
governmental regulation and taxation (under both present and
future legislation) of the production, refining, transportation,
pricing, use and allocation of oil, natural gas, refined products
and substitute fuels. Accordingly, in view of the many
uncertainties affecting the supply and demand for crude oil,
natural gas and refined products, it is not possible to predict
accurately either the prices or marketability of oil and gas
produced from any property in which the Company has or may
acquire an interest.
General Exploration and Production Risks
----------------------------------------
The Company's oil and gas drilling and production activities
involve a high degree of risk. The ratio of dry holes to
commercially productive oil and gas wells is high for the
industry as a whole. Hazards, such as formations with unusual
pressures, or other unforeseen conditions are sometimes
encountered in drilling wells which could result in loss of a
well and in substantial liabilities or injuries to other persons
or property. In addition, the Company may encounter delays due
to adverse weather conditions and difficulties in securing
supplies, drilling and production equipment and access to trained
personnel. The Company seeks to minimize the risks of damage to
the environment, property and persons present in its drilling
operations and obtains insurance coverage which it believes
prudent.
High Degree of Leverage
-----------------------
The Company is currently highly leveraged. Future
operations will be significantly affected by its level of
indebtedness. Much of its cash flow from operations will be
dedicated to interest payments. Large amounts of money will be
required to continue its operations in China. Covenants in the
Indenture governing the Notes (the "Indenture") require the
Company to meet certain financial tests and limit the Company's
ability to dispose of assets or to borrow additional funds. These
covenants may affect the Company's business flexibility, and
could possibly limit acquisition activity.
The Company's ability to meet its debt service obligations
and to reduce its indebtedness will depend upon its future
performance. This, in turn, will depend upon successful
completion of the activities called for in the ODP, the Company's
access to additional capital, general economic conditions, as
well as on financial, business, and other factors, many of which
are beyond the Company's control.
Restrictions Imposed by Terms of the Company's Indebtedness
-----------------------------------------------------------
The Indenture restricts, among other things, the Company's
ability to incur additional debt, incur liens, pay dividends, or
make certain other restricted payments. It also limits the
Company's ability to consummate certain asset sales, enter into
certain transactions with affiliates, enter into mergers or
consolidations, or dispose of substantially all the Company's
assets. The Company's ability to comply with such covenants may
be affected by events beyond its control. The breach of any of
these covenants could result in a default. A default could allow
holders of the Notes to declare all amounts outstanding and
accrued interest immediately due and payable. Absent such
payment, the holders could proceed against any collateral granted
to them to secure such indebtedness, which includes all of the
stock of the Company's principal operating subsidiary, XCL-China,
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.
Oil and Gas Properties; Capital Expenditures
--------------------------------------------
The Company's total reserves, as of December 31, 1997, were
all classified as proved and unevaluated, on a BOE basis.
Recovery of such reserves will require both significant capital
expenditures and successful drilling, completion and production
operations. The Company will also have additional capital
expenditures for exploration activity on the Zhao Dong Block.
The Company plans to generate the additional cash needed
through the sale or financing of its domestic assets held for
sale and the completion of additional equity, debt or joint
venture transactions. There is no assurance, however, that the
Company will be able to sell or finance its assets held for sale
or to complete other transactions in the future at commercially
reasonable terms, if at all, or that it will be able to meet its
future contractual obligations. If production from the oil and
gas properties commences in late 1998 or the first half of 1999,
as anticipated, the Company's proportionate share of the related
cash flow will be available to help satisfy cash requirements.
However, there is likewise no assurance that such development
will be successful and production will commence, and that such
cash flow will be available.
Foreign Operations
------------------
The Company's future operations and earnings will depend
upon the results of the Company's operations in China. If these
operations are not successful, the Company's financial position,
results of operations and cash flows will suffer greatly.
The success of the Company's operations is subject to many
matters beyond management's control, like general and regional
economic conditions, prices for crude oil and natural gas,
competition, and changes in regulation. Also, since the Company
is dependent on international operations, specifically those in
China, it will be subject to various additional political,
economic and other uncertainties. The Company's operations will
be subject to the risks of restrictions on transfer of funds;
export duties, quotas and embargoes; domestic and international
customs and tariffs; and changing taxation policies, foreign
exchange restrictions, political conditions, and governmental
regulations.
The United States government has publicly criticized China
from time to time with respect to various matters. The Company
cannot predict whether political developments like these will
adversely affect the Company's Chinese operations. The Company
believes that neither the Chinese nor the U.S. government wants
to impair U.S.- Chinese commercial relations. The Company has
excellent relations with Chinese governmental authorities in
charge of the development of China's energy resources.
In recent months there have been substantial disruptions in
several Asian financial markets and many Asian currencies have
undergone significant devaluations. These events can be expected
to have negative near, and possibly long term, effects on the
flow of investment capital into and out of Asian denominated
assets. As of this time, China has been largely unaffected by
these events. However, it is impossible to predict the ultimate
outcome of these events and their possible negative effect on the
Company's investments in China.
Reliance on Estimates of Proved Reserves and Future Net
---------------------------------------------------------------
Revenues
--------
The reserve data included in this report are only estimates
and may not prove to be correct. In addition, estimates of
future net revenue from proved reserves are also estimates that
may not prove to be correct. In particular, estimates of crude
oil and natural gas reserves, future net revenue from proved
reserves and the PV-10 thereof for the crude oil and natural gas
properties described in this report 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 the levels assumed for December 31, 1997. These
assumptions include an assumption that the Company will receive a
premium for the C-D Field oil because of its potential for use as
a lubricating oil base stock, the Company's 49% ownership in the
CNPC lubricating oil joint venture and the Company's right under
the joint venture to market both lubricating oil and lubrication
oil feed stock. These assumptions may prove to be inaccurate.
Reserve Value Ceiling Test
--------------------------
Under the SEC's full cost accounting rules, the Company
reviews the carrying value of its oil and gas properties each
quarter on a country-by-country basis. Under such rules,
capitalized costs of oil and gas properties may not exceed the
present value of estimated future net revenues from proved
reserves, discounted at 10 percent, plus the lower of cost or
fair value of unproved properties as adjusted for related tax
effects and deferred tax liabilities. Application of this rule
generally requires pricing future production at the unescalated
oil and gas prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling" is exceeded, even if
prices declined for only a short period of time. If a write-down
is required, the charge to earnings does not impact cash flow
from operating activities. As unproved properties become
evaluated, their costs will be reclassified to proved and
evaluated properties, and any associated future revenue will be
included in the calculation of the present value of the Company's
proved reserves. Costs in excess of the present value of added
reserves, or any material reductions in the net future revenues
from oil and gas reserves resulting from such factors as lower
prices or downward revisions in estimates of reserve quantities,
causes a charge for a full cost ceiling impairment, absent
offsetting improvements.
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.
Environmental Matters
---------------------
The Company is subject to existing federal, state and local
laws and regulations governing the discharge of materials into
the environment or otherwise relating to the protection of the
environment. The Company believes that its U.S. oil and gas
properties, which are held for sale, are in general compliance
with applicable environmental regulations. Environmental laws
and regulations have changed substantially and rapidly over the
last 20 years, and the Company anticipates that there will be
continuing changes. The clear trend in environmental regulation
is to place more restrictions and limitations on activities that
may impact the environment, such as emissions of pollutants,
generation and disposal of wastes and use and handling of
chemical substances. Increasingly strict environmental
restrictions and limitations have resulted in increased operating
costs throughout the United States, and it is possible that the
costs of compliance with environmental laws and regulations will
continue to increase. The Company will attempt to anticipate
future regulatory requirements that might be imposed and to plan
accordingly in order to remain in compliance with changing
environmental laws and regulations minimizing costs of such
compliance.
The Company is and will be required to comply with
environmental laws in China which at this time are significantly
less stringent than U.S. laws.
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.
History of Losses
-----------------
The Company has experienced recurring losses. For the years
ended December 31, 1993, 1994, 1995, 1996 and 1997, the Company
recorded net losses of approximately $15.2 million, $36.6
million, $87.8 million, $12.1 million and $14 million,
respectively. See "Selected Financial Data." There can be no
assurance that the Company will be profitable in the future. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial
Statements and the notes thereto included elsewhere in this
report.
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. 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.
Dependence on Key Personnel
---------------------------
The Company depends to a large extent on Marsden W. Miller,
Jr., its Chairman of the Board and Chief Executive Officer, for
its management and business and financial contacts in China and
its relationship with Chinese authorities. See "Management." The
unavailability of Mr. Miller would have a material adverse effect
on the Company's business. The Company's success is also
dependent upon its ability to retain skilled technical personnel.
While the Company has not to date experienced difficulties in
employing or retaining such personnel, its failure to do so in
the future could adversely affect its business. The Company does
not maintain key man life insurance on any of its executives or
other personnel.
Employees
- ---------
The Company currently employs a total of 23 people
(including executive officers). None of the employees of the
Company or its affiliates have employment contracts or are
represented by collective bargaining agreements. The Company
considers its relationship with employees to be satisfactory.
Item 3. Legal Proceedings.
- ---------------------------
During December 1993, the Company and two of its wholly-
owned subsidiaries, XCL-Texas, Inc. and XCL Acquisitions, Inc.,
were sued in separate lawsuits entitled Ralph Slaughter,
Secretary of the Department of Revenue and Taxation, State of
Louisiana versus The Exploration Company of Louisiana, Inc. (15th
Judicial District, Parish of Lafayette, Louisiana, Docket No. 93-
5449); Ralph Slaughter, Secretary of the Department of Revenue
and Taxation, State of Louisiana versus XCL-Texas, Incorporated
(15th Judicial District, Parish of Lafayette, Louisiana, Docket
No. 93-5450); and Ralph Slaughter, Secretary, Department of
Revenue and Taxation vs. XCL Acquisitions, Inc. (15th Judicial
District, Parish of Lafayette, Louisiana, Docket No. 93-5337) by
the Louisiana Department of Revenue for Louisiana State corporate
franchise and income taxes for the 1987 through 1991 fiscal years
in an aggregate amount of approximately $2.2 million. Statutory
interest at the rate of 15% per annum on the principal will
continue to accrue from September 1, 1993 until paid. The
Louisiana Department of Revenue has also assessed additional
Louisiana State franchise tax against the Company and/or XCL
Acquisitions, Inc. for the tax years 1991 through 1996 and
additional income tax against XCL Acquisitions, Inc. for the tax
years 1991 and 1995 on the same basis as those set forth in the
lawsuits. The Company protested the assessments and small
adjustments were made by the Department of Revenue. The
additional income tax assessment for the 1991 and 1995 tax years
is $89,688 and the additional franchise tax assessment for the
tax years 1991 through 1996 totals $1.6 million plus statutory
interest of 15% per annum from the due date until paid and
penalties not to exceed 25% of the total tax due. The Company
believes that these assessments have been adequately provided for
in the consolidated financial statements. The Company has filed
answers to each of these suits and intends to defend them
vigorously. The Company intends to continue to protest the
assessments. The Company believes that it has meritorious
defenses and has instructed its counsel to contest these claims.
On July 26, 1996, three lawsuits were filed against XCL-
Texas, Inc., a wholly-owned subsidiary of the Company, entitled
Stroman Ranch Company Ltd., el al. v. XCL-Texas, Inc. (229th
Judicial District, Jim Hogg County, Texas, Cause No. 4550), Frank
Armstrong, et al. v. XCL-Texas, Inc. (229th Judicial District,
Jim Hogg County, Texas, Cause No. 4551), and Stroman Ranch
Company Ltd., et al. v. XCL-Texas, Inc. (229th Judicial District,
Jim Hogg County, Texas, Cause No. 4552). The lawsuits allege
various claims, including a claim that one of the oil and gas
leases in the Berry R. Cox Field should be terminated. The
Company believes the claims made in the lawsuit 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 $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 on March 9, 1998, the
lawsuit was dismissed with prejudice.
Other than as disclosed above, as of the date hereof, there
are no material pending legal proceedings to which either the
Company or any of its subsidiaries is a party or to which any of
their properties are subject which would have a material adverse
effect on the business or properties of the Company, taken as a
whole.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
On December 17, 1997, the Company held a Special Meeting in
Lieu of Annual Meeting of Shareholders at the Hotel Acadiana,
1801 West Pinhook Road, Lafayette, Louisiana. A quorum was
present, and the matters put to a vote at the meeting were (1)
election of three Class I directors to the Company's Board of
Directors, (2) approval of an amendment and restatement of the
Company's Certificate of Incorporation to effect a one-for-
fifteen reverse split of the Company's Common Stock, with a
payment in cash in lieu of fractional shares, (3) approval of an
amendment and restatement of the Company's Long Term Stock
Incentive Plan, effective as of June 1, 1997, and certain grants
made thereunder; and (4) approval of the award of an Appreciation
Option to Mr. M.W. Miller, Jr.
The Company's Board of Directors is divided into three
Classes, with each Class consisting of at least one executive
director and at least one non-executive director serving three
year terms. Messrs. Arthur W. Hummel, Jr., Michael Palliser and
Benjamin B. Blanchet were elected as Class I directors at this
meeting. Mr. David A. Melman did not stand for re-election. A
total of not fewer than 321,288,597 votes, constituting a
plurality of all the votes cast at the meeting by holders of
shares present in person or by proxy, were voted for each of the
named persons elected as Class I directors to the Company to
serve until the Annual Meeting of Shareholders to be held in
2000.
Class II directors are Messrs. Marsden W. Miller, Jr.,
Francis J. Reinhardt, Jr. and R. Thomas Fetters, Jr., whose terms
expire at the 1998 Annual Meeting of Shareholders and Class III
directors are Messrs. John T. Chandler and Fred Hofheinz, whose
terms expire at the 1999 Annual Meeting of Shareholders. Mr.
Fetters was appointed as a Class II director on June 5, 1997.
With respect to the resolution relating to the approval and
adoption of an amendment and restatement of the Company's
Certificate of Incorporation to effect a one-for-fifteen reverse
split of the Company's Common Stock, a total of 300,918,175
shares were cast to approve the amendment and restatement as
follows:
217,178,622 shares in favor
23,206,599 shares against
1,843,560 abstentions
47,317,866 broker non-votes
With respect to the resolution relating to the approval and
adoption of an amendment and restatement of the Company's Long
Term Stock Incentive Plan, effective June 1, 1997, including
certain grants made thereunder, a total of 176,656,576 votes were
cast to approve the amendment and restatement and the grants made
thereunder as follows:
147,077,087 votes in favor
29,579,489 votes against
5,204,698 abstentions
With respect to the resolution relating to the award of an
Appreciation Option to Mr. M.W. Miller, Jr., a total of
175,054,879 votes were cast to approve the award as follows:
142,080,643 votes in favor
32,974,236 votes against
6,886,124 abstentions
PART II
Item 5. Market for Registrant's Common Equity and Related
- -----------------------------------------------------------------
Stockholder Matters
-------------------
Market Price for Common Stock
- -----------------------------
The following table shows the range of closing bid prices,
as reported by the American Stock Exchange for the Company's
Common Stock for each quarter during 1996 and 1997. The Company's
Common Stock commenced trading on the American Stock Exchange
("AMEX") in December 1990, under the symbol "XCL." The Company's
Common Stock also trades on The London Stock Exchange Limited
("London Stock Exchange"). On December 17, 1997, the Company
effected a one-for-fifteen reverse split of its Common Stock.
The high and low prices for the periods shown have been adjusted
to reflect the reverse split.
Common Stock Price Per Share
----------------------------
1997 1996
---------- -----------
High Low High Low
---- --- ---- ---
First Quarter........ $5.63 $2.81 $6.60 $2.85
Second Quarter....... $4.69 $2.81 $7.50 $2.85
Third Quarter........ $6.56 $2.81 $5.70 $1.95
Fourth Quarter....... $13.13 $3.88 $3.75 $1.95
On March 31, 1998, the closing price for the Company's
Common Stock on the AMEX was $5.06.
As of March 31, 1998, the Company had approximately 3,600
shareholders of record with respect to its Common Stock.
As of March 31, 1998, there were reserved an aggregate of
(i) 2,679,601 shares of Common Stock subject to outstanding
options; (ii) 12,800,467 shares issuable upon conversion of the
Company's outstanding Amended Series A Preferred Stock; (iii)
17,361,286 shares issuable upon exercise of the Company's
outstanding warrants; (iv) 1,239,078 shares issuable upon
redemption of the Company's outstanding Amended Series B
Preferred Stock; (v) 104,375 shares reserved for sale to fund
working capital for the Company's China projects; (vi) 60,690
reserved for sale to fund general working capital requirements of
the Company; and (vii) 36,373 shares issuable in connection with
contractual obligations. The Company would receive a total of
approximately $86 million if all options and warrants were
exercised and all stock reserved for sale was sold at $5.06 per
share.
The Registrar and U.S. Transfer Agent for the Common Stock
is ChaseMellon Shareholder Services, L.L.C. with a mailing
address of Overpeck Centre, 85 Challenger Road, Ridgefield Park,
New Jersey 07660 (telephone 1-800-851-9677) (internet
www.chasemellon.com), and the name and address of the Company's
U.K. transfer agent is IRG plc, Balfour House, 390/398 High Road,
Ilford, Essex IG1 1NQ, England (telephone 181-478-8241).
Recent Sales of Unregistered Securities
The following sets forth all recent sales of unregistered
securities not previously reported.
The following were private transactions intended to qualify
for the exemption from registration afforded by Section 4(2) of
the Securities Act between the Company and individuals and/or
entities who certified to the Company that they were "accredited
investors" as defined under the Securities Act.
o In December 1997, the Company issued 219,575 shares of
Common Stock to the holders of the Secured Subordinated Notes in
respect of approximately $0.7 million in interest payable April
1, 1997 and October 1, 1997, including penalty interest thereon.
o In December 1997, effective June 1, 1997, the Company issued
20,000 shares of Amended Series A Preferred Stock to officers of
the Company in respect of restricted stock awards granted
pursuant to the Company's amended and restated Long Term Stock
Incentive Plan, approved by shareholders on December 17, 1997.
o In December 1997, shareholders also approved the issuance,
effective June 1, 1997, of an aggregate of 1,333,333 shares of
Common Stock to officers of the Company in respect of restricted
stock awards granted pursuant to the Company's amended and
restated Long Term Stock Incentive Plan.
o On November 3, 1997, the Company issued an aggregate of
12,906 shares of Amended Series A Preferred Stock in respect of
approximately $1.1 million in dividends payable thereon in
additional shares of Amended Series A Preferred Stock due
November 1, 1997.
The following were transactions exempt from registration as
exchanges with and stock issuances to existing shareholders of
the Company.
o On March 4, 1998, the Company issued 44,465 shares of
Amended Series B Preferred Stock in exchange for an equal number
of shares of Series B Preferred Stock and cancellation of
warrants. In addition, the Company issued 2,620 shares of
Amended Series B Preferred Stock in payment of accrued and unpaid
dividends on the shares of Series B Preferred Stock through March
3, 1998.
o Effective January 16, 1998, the Series F, Cumulative
Convertible Preferred Stock (the "Series F Preferred Stock") was
mandatorily converted into an aggregate of 633,893 shares of
Common Stock.
o In November 1997, the outstanding shares of Series A,
Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") and Series E, Cumulative Convertible Preferred Stock (the
"Series E Preferred Stock") were recapitalized and combined into
672,631 shares of Amended Series A Preferred Stock. Accrued and
unpaid stock dividends on the Series A and Series E Preferred
Stock were paid in 117,982 shares of Amended Series A Preferred
Stock.
Dividends on Common Stock
- -------------------------
The Company has not paid any cash dividends on its Common
Stock since inception. The payment of future cash dividends will
be dependent on the Company's earnings, financial condition,
capital requirements and other factors.
Under the terms of the Company's Notes, the Company is
restricted from paying dividends on its Common Stock (other than
with certain securities) without the consent of the Noteholders
unless certain conditions have been met, which they have not at
this time.
Reverse Stock Split
- -------------------
All information in this Form 10-K concerning the Company's
Common Stock reflects a one-for-fifteen reverse split of such
stock approved by the shareholders of the Company on December 17,
1997. See "Item 4. Submission of Matters to a Vote of
Securityholders."
Item 6. Selected 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. 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>
Year Ended December 31
----------------------------------------------------
1993(a) 1994(b) 1995(c) 1996(e) 1997(g)
---------- -------- --------- ------- --------
(In thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 8,499 $ 4,336 $ 2,480 $ 1,136 $ 236
Operating expenses 2,449 1,341 985 342 210
General and administrative expenses 3,840 4,553 4,551 3,487 4,910
Depreciation, depletion and
amortization 5,788 3,292 2,266 579 126
Operating loss (12,518) (33,875) (85,673) (9,793) (8,058)
Net interest expense 1,329 1,831 2,998 2,415 8,450
Interest income 141 508 133 8 2,212
Net loss (15,197) (36,622) (87,837) (12,074) (13,994)
Net loss attributable to common stock (19,978) (41,529) (92,658) (17,430) (27,722)
Net loss per common share
Basic (2.52) (3.14) (5.77) (0.98) (1.36)
Diluted (2.52) (3.14) (5.77) (0.98) (1.36)
Weighted average common
shares outstanding - basic 7,933 13,220 16,047 17,705 20,451
Weighted average common
shares outstanding - diluted 7,933 13,220 16,047 17,705 20,451
Balance Sheet Data (at end of period):
Total working capital (deficit) $(15,562) $ (1,563) $(24,239) $ (46,705) $22,399
Total assets 157,377 149,803 72,336 60,864 119,089
Long-term debt, net of current
maturities 53,965(d) 41,607(d) 15,644 -- (f) 61,310 (h)
Stockholders' equity 84,609 95,200 16,900 11,041 40,825
</TABLE>
- ------------
(a) Includes provision for impairment of domestic oil and gas
properties of $8 million.
(b) Includes provision for impairment of domestic oil and gas
properties of $25.9 million and provision for write-down of
other assets of $2.2 million and an extraordinary loss of
$1.7 million.
(c) Includes provision for impairment of domestic oil and gas
properties of $75.3 million and provision for write-down of
other assets of $4.5 million.
(d) Includes non-recourse debt of an aggregate $0.7 million and
$3.7 million as of December 31, 1994 and 1993, respectively,
included in the Lutcher Moore Debt.
(e) Includes provision for impairment of domestic oil and gas
properties of $3.85 million; provision for write-down of
investment of $2.4 million; and loss on sale of investments
of $0.7 million.
(f) All of the Company's debt ($38.02 million) was classified as
currently due at December 31, 1996.
(g) Includes extraordinary loss for early extinguishment of debt
of $551,000.
(h) Long term debt is net of unamortized discount of $13,690
associated with the value allocated to the stock purchase
warrants issued with the Senior Secured Notes.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The following discussion and analysis should be read in
conjunction with the accompanying consolidated financial
statements, the notes thereto and the supplemental data included
in this Annual Report.
General
- -------
Outlook
-------
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, Capital Resources and Management's Plan
- --------------------------------------------------
Background
----------
The Company's management decided in the fourth quarter of
1995 to focus on the Company's operations in China and to sell
its other assets. The excellent well test results on the China
properties and the Company's reserve assessments support this
decision. The Company has, therefore, focused financially on (i)
raising funds to meet capital requirements for Chinese
operations, (ii) selling its other properties and (iii)
simplifying its capital structure to make it easier to raise
capital. The Company intends to continue these activities and to
work with Apache and CNODC to refine the ODP to reduce
expenditures and accelerate production.
The Company has made significant capital expenditures since
acquiring its interest in the 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. All of its contractual obligations to CNODC and
Apache have been met and the Company believes that it will
continue to do so.
The Company's opinion that it will be able to obtain the
funds necessary to pay its share of capital expenditures to the
point where cash flow is sufficient to pay costs is based on the
Company's assessment of the ultimate quantity of oil reserves
which will be produced from the Zhao Dong Block. Presently proven
gross oil reserves under the Zhao Dong Block of approximately 47
million barrels represents only 6.5% of the Company's independent
engineers' estimates of approximately 725 million of ultimately
recoverable gross oil reserves in all categories of proven,
probable, possible and exploration. Additionally, the Company
believes, based on discussions with the Chinese authorities
during the last year, that it will acquire additional oil and gas
exploration and development blocks in China, with proven oil
reserves, which will further enhance the Company's ability to
timely obtain adequate funds for its obligations in China.
Additional funds may be available from a number of sources,
including cash flow from production on the Zhao Dong Block, the
sale or recapitalization of the Lutcher Moore Tract and the other
assets held for sale, project financing, increasing the amount of
senior secured debt, supplier financing, additional equity,
including the exercise of currently outstanding warrants to buy
common stock and joint ventures with other oil companies. Based
on continuing discussions with major stockholders, investment
bankers, potential purchasers and other oil companies, the
Company believes that such funds will be available. There is no
assurance, however, that such funds will be available and, if
available, that they will be available on commercially reasonable
terms, or that sufficient cash flow will be available from the
Zhao Dong Block. New debt will require approval of the holders of
the Company's long term debt. See "Risk Factors."
Liquidity and Capital Resources
-------------------------------
The Company offered and sold $75 million of Notes and $25
million of equity on May 20, 1997. During 1997 such funds were
used to pay costs of the offering, the Company's 1997 exploration
and development costs and $28 million of debt. At December 31,
1997, the Company had an unrestricted operating cash balance of
$22.0 million and restricted cash held in escrow for the payment
of interest on the notes of $10.3 million. The Company had net
working capital of $22.4 million.
As a result of the Company's decision to focus on China and
sell its U.S. assets, the Company presently has no source of
material revenues. Revenues for 1997 were $236,000 versus
$1,136,000 in 1996. The Company incurred a loss for fiscal 1997
of $13,994,000 and expects to incur a loss in 1998 as well
because production and related cash flow from the Zhao Dong Block
is not expected until late 1998 at the earliest.
Management's Plan
-----------------
The Company's unrestricted cash will be required for working
capital and exploration, development and production expenditures
on the 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 during 1998. Except for
exploratory wells on which Apache has an obligation to pay for
the Company's costs, the Company is required to fund 50% of all
exploration expenditures and 24.5% of all development and
production expenditures. The Company estimates that its share of
actual development expenditures for the C-D Field for the
remainder of 1998 will be approximately $8 million, which is
available from current unrestricted cash reserves. The Company
estimates that its share of unpaid exploration expenses for the
remainder of 1998 will be approximately $13 million. The Company
presently projects and plans that these funds will be available
from current unrestricted cash reserves and a portion of the
proceeds from the sale or refinancing of the Lutcher Moore Tract.
The Company estimates that its share of development expenses for
1999 will be approximately $22 million. After expenditure of
those 1998 and 1999 projected development expenses, the Company
projects that proceeds from production will pay for additional
expenditures. After participation in the projected exploration
program for 1998, the Company presently projects and plans that
1999 development funds will be available from proceeds from a
portion of the sale of Lutcher Moore, a financing of the final
payment which Apache owes XCL for the 1995 purchase of an
additional 8.325% interest in the C Field and proceeds from the
early exercise of at least a portion of the currently outstanding
warrants to purchase common stock. Furthermore, although the
Company believes that by the end of 1998 all obligatory
exploration wells will have been drilled, the Company anticipates
that additional exploration wells will be drilled during 1999.
Funds for these exploratory wells will be obtained from the same
sources. Again, there is no assurance that the sources of funds
projected in this paragraph will be available. If not available,
the Company plans to utilize other sources of funds, as referred
to above under "Background."
Due to the successful results of the D-3 and C-4 Wells, the
1998 work program and budget exceed the Company's initial
preliminary projections earlier in 1997. This results from the
necessity of drilling at least one appraisal well offsetting the
C-4 exploratory well and the decision to extend the Contract into
its third exploratory period because of the successful drilling
of the D-3 and C-4 wells. XCL, Apache, and CNODC are working
together to reduce capital costs for the Zhao Dong Block and to
determine whether the commencement of production from the C-4
Well area can be accelerated into late 1998. This work has
already resulted in reductions of capital costs of approximately
$35 million based on a change in the conceptual design, and a
determination that it is technically feasible to commence
production from the C-4 well area in 1998. The Company, Apache
and CNODC have now all agreed to make every effort to achieve
initial production in 1998.
Longer term liquidity is dependent upon the Company's future
performance, including commencement of production in China, as
well as continued access to capital markets. In addition, the
Company's efforts to secure additional financing could be
impaired if its common stock is delisted from the AMEX.
Although the Company is not obligated to make any additional
capital payments to such projects, the Company may also have
capital requirements for its lubricating oil and coalbed methane
projects. The Company believes that both businesses will be
successful and grow and that the Company will make additional
investments in the businesses.
Other
- -----
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
earned which may become payable. Approximately $0.9 million
of compensation expense was recorded in connection with these
awards during 1997.
The Company believes that inflation has had no material
impact on its sales, revenues or income during the reporting
periods. In light of increased oil and gas exploration activity
worldwide, and in the Bohai Bay in particular, increased rates
for equipment and services, and limited rig availability may have
an impact in the future.
The Company is subject to existing domestic and Chinese
federal, state and local laws and regulations governing
environmental quality and pollution control. Although management
believes that such operations are in general compliance with
applicable environmental regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations, and there
can be no assurance that significant costs and liabilities will
not be incurred. See "Environmental Matters."
New Accounting Pronouncements
- -----------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which is effective for the Company's year
ending December 31, 1998. SFAS No. 130 establishes standards for
the reporting and displaying of comprehensive income and its
components. The Company will be analyzing SFAS No. 130 during
1998 to determine what, if any, additional disclosures will be
required.
In June 1997, the FASB Issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which
is effective the Company's year ended December 31, 1998. This
statement establishes standards for reporting of information
about operating segments. The Company will be analyzing SFAS No.
131 during 1998 to determine what, if any, additional disclosures
will be required.
Results of Operations
- ---------------------
1997 compared to 1996
- ---------------------
The Company incurred a loss of $14 million in 1997, as
compared with a loss of $12 million in 1996. Included in the
loss for 1997 is a charge of $0.9 million for non-cash
compensation charges, related to stock and appreciation options,
which are classified in general and administrative expenses. In
addition, 1997 includes a $2.8 million provision for estimated
settlements in connection with various disputes and litigation
matters. Such amount is reflected in Other in the Statement of
Operations. In addition, $0.6 million of non-cash charges relate
to early extinguishment of debt.
Interest expense, net of amounts capitalized, increased $6.0
million in 1997 primarily as a result of increased borrowings and
higher interest rates on the new debt. In addition, interest
expense includes amortization of $1.3 million relating to the
value assigned to warrants issued with the $75 million debt
offering completed in May 1997.
The net loss for 1996 includes a $3.85 noncash charge for
the provision of impairment of domestic oil and gas properties
classified as held for sale. The loss in 1996 also reflects the
effect of a $2.4 million write-down and $0.7 million loss on sale
of the Company's investments.
Oil and gas revenues from properties held for sale for the
year ended December 31, 1997 were $236,000, compared to
approximately $1.1 million during 1996. Revenues will continue to
decline as the Company completes its announced program of selling
substantially all of its U.S. producing properties. Interest
income increased $2.2 million during the year ended December 31,
1997, compared with 1996. The primary reason for this increase
was the interest earned on the $75 million held in escrow from
the Note Offering.
As the Company continues to focus its resources on
exploration and development of the Zhao Dong Block, future oil
and gas revenues will initially be directly related to the degree
of drilling success experienced. The Company does not anticipate
significant increases in its oil and gas production in the short-
term and expects to incur operating losses until such time as net
revenues from the China projects are realized.
General and administrative expenses increased $1.4 million
during 1997 as compared with 1996, as reflected in the following
table.
1997 1996
---- ----
(thousands)
Payroll, benefits and travel $ 1,554 $ 1,683
Non-cash compensation cost 853 --
Legal and professional 1,284 510
Public company and corporate expenses 574 539
Lafayette office expense 304 374
Corporate insurance 341 381
------- ------
$ 4,910 $ 3,487
======= ======
The increase in legal and professional fees of $774,000 were
principally related to fees of $214,000 on one lawsuit, an
increase of $287,000 for outside consulting and the remainder of
the increase for general and corporate legal and accounting
services.
1996 compared to 1995
The Company reported a net loss for fiscal 1996 of $12.1
million compared to a net loss for 1995 of $87.8 million. 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 late 1998 at the earliest when
production in China may commence.
General and administrative expenses for 1996 were $3.5
million as compared to $4.6 million in 1995. General and
administrative costs are expected to remain relatively unchanged
during the upcoming year. Operating costs are expected to
decline due to the further disposition of domestic oil and gas
properties.
Interest expense decreased in 1996, due primarily to the
Company's principal payments on its institutional debt in the
first quarter of 1996.
Subsequent Events
- -----------------
Effective January 16, 1998, the Series F Preferred Stock was
mandatorily converted into an aggregate of 633,893 shares of
Common Stock. Due to the Series F Preferred Stock being redeemed
and the Series A and E Preferred Stock being converted to Amended
Series A Preferred Stock, the Company's Preferred Stock dividend
obligations in respect of such securities have been eliminated.
The effect of the recapitalization of the Series A and the Series
E Preferred Stock has resulted in an increase in the Company's
Preferred Stock dividend obligations of $3.7 million annually
which can now be paid in kind in shares of Amended Series A
Preferred Stock (valued at $85 per share). Aggregate liquidation
preference increased from $63.3 million in 1996 to $103 million
in 1997.
Effective December 31, 1997, the Company entered into an
interim settlement agreement with the holder of the Series B
Preferred Stock whereby the Company paid such holder $1 million
as a deposit in anticipation of the settlement of a lawsuit
commenced by such holder for a claimed aggregate redemption price
of such stock of $5.0 million and accrued and unpaid dividends to
the redemption date. The final settlement took place on March 3,
1998, and the lawsuit was dismissed with prejudice on March 9,
1998. Pursuant to the settlement, the holder of the Series B
Preferred Stock sold the stock and warrants and the buyer
exchanged the Series B Preferred Stock for Amended Series B
Preferred Stock and warrants, returned the old warrants to the
Company for cancellation and received payment of accrued and
unpaid dividends on the Series B Preferred Stock in shares of
Amended Series B Preferred Stock. The $1 million deposit was
returned upon receipt of the proceeds from the sale of the Series
B Preferred Stock.
Year 2000 Compliance
- --------------------
The Company has conducted a review of its computer systems
to identify the systems that could be affected by the "Year 2000"
issue. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year and equipment with time-sensitive embedded
components. Any of the Company's programs that have time-
sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system
failure or miscalculations. Although no assurance can be given
because of the potential wide scale manifestations of this
problem which may affect the Company's business, XCL presently
believes that the Year 2000 problem will not pose significant
operational problems for its computer systems and that the Year
2000 problem will not have a material impact on its costs of
operations.
The Company also may be vulnerable to other companies' Year
2000 issues. The Company's current estimates of the impact of
the Year 2000 problem on its operations and financial results do
not include costs and time that may be incurred as a result of
any vendors' or customers' failure to become Year 2000 compliant
on a timely basis. The Company intends to initiate formal
communications with all of its significant vendors and customers
with respect to such persons' Year 2000 compliance programs and
status. However, there can be no assurance that such other
companies will achieve Year 2000 compliance or that any
conversions by such companies to become Year 2000 compliant will
be compatible with the Company's computer system. The inability
of the Company or any of its principal vendors or customers to
become Year 2000 compliant in a timely manner could have a
material adverse effect on the Company's financial condition or
results of operations.
Item 8. Financial Statements and Supplemental Data.
The Consolidated Financial Statements of XCL Ltd. and
Subsidiaries and XCL-China Ltd., together with the reports
thereon of Coopers & Lybrand L.L.P. dated April 10, 1998, and the
supplementary financial data specified by Item 302 of Regulation
S-K are set forth on pages [] through []. See Item 14 for Index.
<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 Item 14(a) of this Annual Report on Form 10-K. These
consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of XCL Ltd. and Subsidiaries as of December
31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company is generating minimal revenues and
although the Company has cash (including its restricted cash) in
the amount of approximately $32 million as of December 31, 1997,
and a positive working capital position, it must generate
additional cash flows to satisfy its development and exploratory
obligations with respect to its China properties. There is no
assurance that the Company will be able to generate the necessary
funds to satisfy these contractual obligations and to ultimately
achieve profitable operations, which creates doubt about its
ability to continue as a going concern. Managements' plans in
regard to these matters are described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1998
<PAGE>
XCL Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31
-------------------
A S S E T S 1997 1996
----------- ---- ----
Current assets:
Cash and cash equivalents $ 21,952 $ 113
Cash held in escrow (restricted) 10,263 --
Accounts receivable, net 101 23
Refundable deposits 1,200 --
Other 451 212
-------- ------
Total current assets 33,967 348
-------- ------
Property and equipment:
Oil and gas (full cost method):
Proved properties under development not being
amortized 21,172 13,571
Unevaluated properties 33,132 21,238
------- -------
54,304 34,809
Land, at cost -- 135
Other 1,163 2,492
------- -------
55,467 37,436
Accumulated depreciation, depletion and
amortization (1,000) (1,491)
------- -------
54,467 35,945
------- -------
Investments 4,173 2,383
Assets held for sale 21,155 21,058
Debt issue costs, less amortization 4,268 950
Other assets 1,059 180
------- ------
Total assets $ 119,089 $ 60,864
======== =======
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
-------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued costs $ 2,727 $ 3,901
Due to joint venture partner 4,504 4,202
Dividends payable 1,813 928
Current maturities of long term debt 2,524 38,022
-------- -------
Total current liabilities 11,568 47,053
-------- -------
Long-term debt, net of current maturities 61,310 --
Other non-current liabilities 5,386 2,770
Commitments and contingencies (Notes 2 and 11)
Shareholders' equity:
Preferred stock-$1.00 par value; authorized
2.4 million shares at December 31, 1997
and 1996; issued shares of 1,196,236 at
December 31, 1997 and 669,411 at
December 31, 1996 - liquidation preference
of $103 million at December 31, 1997 1,196 669
Common stock-$.01 par value; authorized 500
million shares at December 31, 1997
and 1996; issued shares of 21,710,257 at
December 31, 1997 and 285,754,151 at
December 31, 1996 217 2,858
Common stock held in treasury - $.01 par value;
69,470 shares at December 31, 1997
and 1,042,065 shares at December 31, 1996 (1) (10)
Unearned compensation (12,021) --
Additional paid-in capital 298,588 226,956
Accumulated deficit (247,154) (219,432)
-------- -------
Total shareholders' equity 40,825 11,041
-------- -------
Total liabilities and
shareholders'equity $ 119,089 $ 60,864
======== =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT 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 STATEMENT 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 STATEMENT 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>
Preference in 1997 Dividends
Shares Liquidation at (In Thousands)
1997 1996 December 31, 1997 Declared Accrued Total
---- ---- ----------------- ------------- ------- -----
<CAPTION>
<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.
The restricted stock awards generally rests only upon
attainment of certain increases in the market price of the
Company's Common Stock within four years from date of grant. All
of the restricted stock awards entitle the participants to full
dividend and voting rights. Unvested shares are restricted as to
disposition and subject to forfeiture under certain conditions.
Upon issuance of restricted shares, unearned compensation is
charged to shareholders' equity for the cost of restricted stock
and recognized as amortization expense ratably over the vesting
period, as applicable. The amount recognized for 1997 was not
material because the measurement date was December 17, 1997.
The appreciation option awarded to the Chairman provides him
with the right upon his payment of the exercise price (20% of
amount entitled to receive) to additional compensation payable in
cash or in shares of Common Stock based upon 5% of the difference
between the market capitalization (as defined) of the Company as
of June 1, 1997, and the date the option is exercised (no earlier
than June 1, 2002). Because the option contemplates compensation
determined with reference to increases in the market
capitalization without restriction, there is no effective limit
on the amount of compensation which may become payable
thereunder. Deferred compensation of $3.2 million was recorded in
connection with the appreciation option and is being amortized
over the service period. The appreciation option expires on June
1, 2007. Compensation expense recognized in 1997 was
approximately $373,000.
Non-qualified options granted on June 1, 1997 for an option
price of $3.75 per share resulted in compensation expense for
1997 of $481,000. The measurement date was established on
December 17, 1997, the date of shareholder approval.
A summary of the stock option plans activity for the years
ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION> Weighted Average
Shares Option Price Per Share Exercise Price
------- ---------------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 831,012 $12.50 - $22.50 $18.83
Granted 45,333 $18.75 $18.75
Forfeited (104,167) $12.50 - $22.50 $18.23
--------- ---------------
Outstanding at December 31, 1995 772,178 $12.50 - $22.50 $18.91
Granted 16,133 $18.75 $18.75
Forfeited (101,467) $18.75 - $22.50 $20.14
--------- ---------------
Outstanding at December 31, 1996 686,844 $12.50 - $22.50 $18.72
Granted 2,000,000 $3.75 $3.75
Forfeited (7,238) $18.75 - $22.50 $19.12
--------- ---------------
Outstanding at December 31, 1997 2,679,606 $3.75 - $22.50 $7.55
========= ==============
Options exercisable at December 31, 1997 676,451
=======
Options exercisable at December 31, 1998 676,089
=======
Options exercisable at December 31, 1999 683,888
=======
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
______________________________________________________________________ __________________________________
Weighted average
Range of Outstanding at remaining life Weighted average Exercisable 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
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 (Unaudited)
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
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
The supplementary information set forth below presents
estimates of discounted future net cash flows from proved oil and
gas reserves and changes in such estimates. This information has
been prepared in accordance with requirements prescribed by the
Financial Accounting Standards Board (FASB). Inherent in the
underlying calculations of such data are many variables and
assumptions, the most significant of which are briefly described
below:
Future cash flows from proved oil and gas reserves were
computed on the basis of (a) contractual prices for oil and gas -
including escalations for gas - in effect at year-end, or (b) in
the case of properties being commercially developed but not
covered by contracts, the estimated market price for gas and the
posted price for oil in effect at year-end. Probable and
possible reserves - a portion of which, experience has indicated,
generally become proved once further development work has been
conducted - are not considered. Additionally, estimated future
cash flows are dependent upon the assumed quantities of oil and
gas delivered and purchased from the Company. Such deliverability
estimates are highly complex and are not only based on the
physical characteristics of a property but also include
assumptions relative to purchaser demand. Future prices actually
received may differ from the estimates in the standardized
measure.
Future net cash flows have been reduced by applicable
estimated operating costs, production taxes and future
development costs, all of which are based on current costs.
Future net cash flows are further reduced by future income
taxes which are calculated by applying the statutory federal
income tax rate to pretax future net cash flows after utilization
of available tax carryforwards.
To reflect the estimated timing of future net cash flows,
such amounts have been discounted by the FASB prescribed annual
rate of 10 percent.
In view of the uncertainties inherent in developing this
supplementary information, it is emphasized that the information
represents approximate amounts which may be imprecise and extreme
caution should accompany its use and interpretation.
Standardized Measure of Discounted Future Net Cash Flows Related
- ----------------------------------------------------------------
to Proved Oil and Gas Reserves
-------------------------------
The standardized measure of discounted future net cash flows
from proved oil and gas reserves, determined in accordance with
rules prescribed by the FASB, is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1997 (a) 1996 (a) 1995 (a)
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Future cash inflows $ 205,358 $ 222,797 $ 103,048
Future costs:
Production, including taxes (45,624) (39,033) (20,937)
Development (41,093) (40,904) (35,276)
------- ------- -------
Future net inflows before income taxes 118,641 142,860 46,835
Future income taxes (b) -- -- --
------- ------- ------
Future net cash flows 118,641 142,860 46,835
10% discount factor (56,194) (63,798) (20,795)
Transfer of properties to assets held for sale -- -- (26,040)
-------- ------ ------
Standardized measure of discounted net cash flows $ 62,447 $ 79,062 $ --
======== ======= =======
</TABLE>
_____________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties only.
(b) No taxes have been reflected because of utilization of net
operating loss carryforwards.
Changes in Standardized Measure of Discounted Future Net Cash
--------------------------------------------------------------
Flow From Proven Reserve Quantities
-----------------------------------
Year Ended December 31
-------------------------------
1997 (a) 1996 (a) 1995 (a)
-------- -------- --------
(Thousands of Dollars)
Standardized measure-beginning of year $ 79,062 $ -- $ 60,248
Increases (decreases):
Sales and transfers, net of production
costs -- -- (1,347)
Net change in sales and transfer prices,
net of production costs (16,396) -- (15,095)
Extensions, discoveries and improved
recovery, net of future costs -- 79,062 --
Changes in estimated future development
costs (189) -- (2,886)
Development costs incurred during the
period that reduced future development
costs -- -- 1,117
Revisions of quantity estimates -- -- (8,003)
Accretion of discount -- -- 6,024
Purchase (sales) of reserves in place -- -- (4,654)
Changes in production rates (timing) and
other -- -- (9,364)
Reclassification of reserves to assets
held for sale -- -- (26,040)
------- ------ -------
Standardized measure-end of year $ 62,477 $ 79,062 $ --
======= ======= =======
__________
(a) 1997 and 1996 represent China properties only. 1995
represents U.S. properties only.
<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 Item 14(a) of this Annual Report on Form 10-K. 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 and is dependent upon its parent to
meet its cash flow requirements and must, in conjunction with its
parent company, generate additional cash flows to satisfy its
development and exploratory obligations with respect to its oil
and gas properties. There is no assurance that the Company or its
parent will be able to generate the necessary funds to satisfy
these contractual obligations and to ultimately achieve
profitable operations, which creates doubt about its ability to
continue as a going concern. Managements' plans in regard to
these matters are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1998
<PAGE>
XCL-China, Ltd.
BALANCE SHEET
(Thousands of Dollars)
December 31
--------------
A S S E T S 1997 1996
----------- ---- ----
Current assets:
Accounts receivable, net $ 101 $ 122
Other 2 45
----- -----
Total current assets 103 167
----- -----
Property and equipment:
Oil and gas (full cost method):
Proved properties under development not
being amortized 21,172 13,571
Unevaluated properties 33,132 21,238
------- ------
54,304 34,809
Other 167 138
------ ------
54,471 34,947
Accumulated depreciation (1) --
------ ------
54,470 34,947
------ ------
Other assets 668 --
------ ------
Total assets $ 55,241 $ 35,114
====== ======
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- -------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued costs $ 285 $ 556
Due to joint venture partner 4,503 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.
STATEMENT OF OPERATIONS
(In Thousands)
Year Ended December 31
----------------------
1997 1996 1995
---- ---- ----
Revenues $ -- $ -- $ --
---- ---- -----
Costs and operating expenses:
Depreciation 1 -- --
General and administrative costs 578 702 536
---- ----- -----
579 702 536
---- ----- -----
Operating loss (579) (702) (536)
---- ----- -----
Other income (expense):
Interest expense, net of amounts
capitalized (134) -- --
Interest income -- -- 49
----- ----- -----
(134) -- 49
----- ----- -----
Net loss $ (713) $ (702) $ (487)
===== ==== ====
The accompanying notes are an integral part of these financial statements.
<PAGE>
XCL-China
STATEMENT OF SHAREHOLDERS' DEFICIT
(Thousands of Dollars)
Balance, December 31, 1994 $ (28)
Net loss (487)
-------
Balance, December 31, 1995 (515)
Net loss (702)
-------
Balance, December 31, 1996 (1,217)
Net loss (713)
-------
Balance, December 31, 1997 $ (1,930)
=======
The accompanying notes are an integral part of these financial statements.
<PAGE>
XCL-China, Ltd.
STATEMENT 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 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 (Unaudited)
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
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
The supplementary information set forth below presents
estimates of discounted future net cash flows from proved oil and
gas reserves and changes in such estimates. This information has
been prepared in accordance with requirements prescribed by the
Financial Accounting Standards Board (FASB). Inherent in the
underlying calculations of such data are many variables and
assumptions, the most significant of which are briefly described
below:
Future cash flows from proved oil and gas reserves were
computed on the basis of (a) contractual prices for oil and gas -
including escalations for gas - in effect at year-end, or (b) in
the case of properties being commercially developed but not
covered by contracts, the estimated market price for gas and the
posted price for oil in effect at year-end. Probable and
possible reserves - a portion of which, experience has indicated,
generally become proved once further development work has been
conducted - are not considered. Additionally, estimated future
cash flows are dependent upon the assumed quantities of oil and
gas delivered and purchased from the Company. Such deliverability
estimates are highly complex and are not only based on the
physical characteristics of a property but also include
assumptions relative to purchaser demand. Future prices actually
received may differ from the estimates in the standardized
measure.
Future net cash flows have been reduced by applicable
estimated operating costs, production taxes and future
development costs, all of which are based on current costs.
Future net cash flows are further reduced by future income
taxes which are calculated by applying the statutory federal
income tax rate to pretax future net cash flows after utilization
of available tax carryforwards.
To reflect the estimated timing of future net cash flows,
such amounts have been discounted by the FASB prescribed annual
rate of 10 percent.
In view of the uncertainties inherent in developing this
supplementary information, it is emphasized that the information
represents approximate amounts which may be imprecise and extreme
caution should accompany its use and interpretation.
Standardized Measure of Discounted Future Net Cash Flows Related
to Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows
from proved oil and gas reserves, determined in accordance with
rules prescribed by the FASB, is summarized as follows:
Year Ended December 31
--------------------
1997 1996
---- ----
(Thousands of Dollars)
Future cash inflows $ 205,358 $ 222,797
Future costs:
Production, including taxes (45,624) (39,033)
Development (41,093) (40,904)
------- -------
Future net inflows before income taxes 118,641 142,860
Future income taxes -- --
------- --------
Future net cash flows 118,641 142,860
10% discount factor (56,194) (63,798)
Transfer of properties to assets held for sale -- --
------- --------
Standardized measure of discounted net cash flows $ 62,447 $ 79,062 -
======= =======
Changes in Standardized Measure of Discounted Future Net Cash
Flow From Proven Reserve Quantities
Year Ended December 31
----------------------
1997 1996
---- ----
(Thousands of Dollars)
Standardized measure-beginning of year $ 79,062 $ --
Increases (decreases):
Sales and transfers, net of production costs -- --
Net change in sales and transfer prices, net of
production costs (16,396) --
Extensions, discoveries and improved recovery,
net of future costs -- 79,062
Changes in estimated future development costs (189) --
Development costs incurred during the period that
reduced future development costs -- --
Revisions of quantity estimates -- --
Accretion of discount -- --
Purchase (sales) of reserves in place -- --
Changes in production rates (timing) and other -- --
Reclassification of reserves to assets held for sale -- --
------ -------
Standardized measure-end of year $ 62,477 $ 79,062
====== =======
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure.
There have been no changes in and there are no disagreements
with the Company's accountants on accounting and financial
disclosure.
PART III
Item 10. Directors and Executive Officers of the
Registrant.
Officers of the Company and its wholly owned subsidiaries
serve at the pleasure of the Board of Directors and are appointed
annually at the meeting of the Board of Directors immediately
following the annual meeting of shareholders. The following
individuals were officers and directors of the Company and its
subsidiaries as of December 31, 1997:
<TABLE>
Officer Director
Name Position Age Since Since
---- -------- --- ------- --------
<S> <C> <C> <C> <C>
Marsden W. Miller, Jr. Chairman of the Board and Chief
Executive Officer of the Company (1) 56 1981 1981
John T. Chandler Vice Chairman of the
Board of the Company and Chairman
and Chief Executive Officer of
XCL-China Ltd. (1)(4) 65 1982 1983
Danny M. Dobbs President and Chief Operating
Officer of the Company and
President of XCL-China Ltd.(4) 52 1991 --
Benjamin B. Blanchet Executive Vice President and
Director of the Company(1) 45 1997 1997
Steven B. Toon Chief Financial Officer of the Company 49 1997 --
Richard K. Kennedy Vice President of Engineering
of the Company 44 1989 --
R. Carter Cline Vice President-Land of the Company 49 1990 --
Herbert F. Hamilton Executive Vice President Operations,
XCL-China Ltd.(4) 61 1995 --
John H. Haslam Treasurer of the Company 56 1996 --
Lisha C. Falk Secretary of the Company 36 1997 --
Fred Hofheinz Director of the Company,
Attorney at Law(2)(3) 59 -- 1991
Arthur W. Hummel, Jr. Director of the Company,
Independent Consultant(2)(3) 77 -- 1994
Sir Michael Palliser Director of the Company,
Independent Consultant(2)(3) 75 -- 1994
Francis J. Reinhardt, Jr. Director of the Company, Partner
in Carl H. Pforzheimer & Co.(2)(3) 68 -- 1992
R. Thomas Fetters, Jr.. Director of the Company,
Independent Consultant (2)(3) 58 -- 1997
_______________
(1) Member of the Executive Committee. The Committee met once
during 1997 and, subject to certain statutory limitations on
its authority, has all of the powers of the Board of
Directors while the Board is not in session, except the
power to declare dividends, make and alter Bylaws, fill
vacancies on the Board or the Executive Committee, or change
the membership of the Executive Committee.
(2) Member of the Compensation Committee. The Committee met
once in 1997. It is charged with the responsibility of
administering and interpreting the Company's stock option
plans; it also recommends to the Board the compensation of
employee-directors, approves the compensation of other
executives and recommends policies dealing with compensation
and personnel engagements.
(3) Member of the Audit Committee. The Committee met once in
1997. It reviews with the independent auditors the general
scope of audit coverage. Such review includes consideration
of the Company's accounting practices, procedures and system
of internal accounting controls. The Committee also
recommends to the Board the appointment of the Company's
independent auditors, and at least annually the Committee
reviews the services performed and the fees charged by the
independent auditors engaged by the Company.
(4) XCL-China Ltd. is an International Business Company
incorporated under the laws of the British Virgin Islands,
wholly owned by the Company, which manages the Company's oil
and gas operations in China.
Under the Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws of the Company, the
Board Directors is divided into three classes of directors
serving staggered three-year terms, with one class to be elected
at each annual meeting of shareholders and to hold office until
the end of their term and until their successors have been
elected and qualified. The current Class I directors, whose
terms of office expire at the 2000 annual meeting of
shareholders, are Messrs. Arthur W. Hummel, Jr., Michael Palliser
and Benjamin B. Blanchet; the current Class II directors, whose
terms of office expire at the 1998 annual meeting of
shareholders, are Messrs. Marsden W. Miller, Jr., R. Thomas
Fetters, Jr. and Francis J. Reinhardt, Jr.; and the current Class
III directors, whose terms of office expire at the 1999 annual
meeting of shareholders, are Messrs. John T. Chandler and Fred
Hofheinz.
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.
Pursuant to the terms of an agreement dated April 17, 1992
between the Company and CIDC, the Company granted to CIDC the
right to appoint a nonvoting observer to the Company's Board of
Directors so long as CIDC owns at least 16,667 shares of Series B
Preferred Stock or their equivalent in Common Stock on an as
converted basis. As a result of a March 1998 settlement of
certain litigation instituted by CIDC against the Company and
others in respect of CIDC's shares of Series B Preferred Stock,
CIDC is no longer a shareholder of the Company. See "Business --
Litigation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Subsequent
Events."
The holders of the Amended Series A Preferred Stock are
entitled to cast the same number votes (voting together with the
Common Stock as a single class) as the number of shares of Common
Stock issuable upon conversion of the Amended Series A Preferred
Stock.
The holders of the Amended Series B Preferred Stock are
entitled to cast 50 votes per share (voting together with the
Common Stock as a single class).
There are no arrangements or understandings with any
directors pursuant to which they have been elected a director nor
are there any family relationships among any directors or
executive officers.
Biographical Information
- ------------------------
MARSDEN W. MILLER, JR., Chairman, has been Chief Executive
Officer and a director since the Company's incorporation in 1981.
He has engaged in the independent domestic and international oil
business since 1964 on an individual basis, as a stockholder and
officer in several companies and as a practicing attorney. In
addition to the U.S. and China, he has been involved in various
aspects of the oil business in Southeast Asia, Africa, Europe,
South America, several former Soviet Republics and Canada. Mr.
Miller graduated from Louisiana State University in 1964.
JOHN T. CHANDLER is Vice Chairman of the Board and Chairman
and Chief Executive Officer of XCL-China. He joined the Company
in June 1982, becoming a director in May 1983. From 1976 until
he joined the Company he was the Managing Partner of the Oil and
Gas Group of GSA Equity, Inc., New York and director of Executive
Monetary Management, Inc., the parent company of GSA Equity, Inc.
From 1972 to 1976, he was director and Vice President of
Exploration and Production of Westrans Petroleum, Inc. and a
director of a number of its subsidiaries. During 1971 and 1972,
he was a petroleum consultant and manager of the oil department
of Den norske Creditbank in Oslo, Norway. Mr. Chandler was Vice
President and Manager of the Petroleum Department of the Deposit
Guaranty National Bank in Jackson, Mississippi from 1969 to
August 1971 and, from 1967 to February 1969, was a petroleum
engineer first for First National City Bank (now known as
Citibank, N.A.) and then The Bank of New York. From March 1963 to
July 1967, he was employed by Ashland Oil and Refining Company as
a petroleum engineer. From 1959 to 1963, he held the same
position with United Producing Company, Inc., which was acquired
by Ashland Oil.
Mr. Chandler graduated from the Colorado School of Mines
with a Professional degree in petroleum engineering and is a
Registered Professional Engineer in the States of Colorado and
Texas, a member of the Society of Petroleum Evaluation Engineers
and a member of AIME.
DANNY M. DOBBS is the President and Chief Operating Officer
of the Company effective December 17, 1997. Mr. Dobbs
previously served as Executive Vice President and Chief Operating
Officer of the Company and prior to that as Vice President-
Exploration of XCL Exploration & Production, Inc., a wholly-owned
subsidiary of the Company, having joined the Company in 1985 as
Senior Exploration Geologist. From 1981 to 1985 Mr. Dobbs was a
consulting geologist. From 1976 to 1981, he held the position of
Exploration Geologist in the South Louisiana District for Edwin
L. Cox in Lafayette, Louisiana. He served in various geologic
positions with Texaco, Inc. from 1971 to 1976, his experience
encompassing management, structural and stratigraphic mapping,
coordination of seismic programs and budget evaluation and
preparation. Mr. Dobbs holds B.S. and M.S. degrees in geology
from the University of Alabama, Tuscaloosa, Alabama.
BENJAMIN B. BLANCHET is Executive Vice President and
director of the Company. Prior to joining the Company in August
1997, and since 1983, he was a partner in the law firm of Gordon,
Arata, McCollam & Duplantis, L.L.P. in its Lafayette, Louisiana
office. During that time, he practiced in the areas of
commercial litigation, corporate mergers and acquisitions, oil
and gas transactions, secured financings, securities, tax and
international law matters. Since 1985, he has provided
substantial legal services to the Company, and has been the
Company's lead attorney in China. During that period, Mr.
Blanchet's activities in the Company's China operations have
become more oriented to management responsibilities than legal
ones. He served on the Management Committee of Gordon, Arata,
McCollam & Duplantis, L.L.P. from 1991 to 1997 and as the
Managing Partner of the firm for four years from 1992 through
1995. He practiced law with the firm of Monroe & Lemann in New
Orleans from 1978 through 1983. He is a member of the Louisiana
Bar and admitted to practice before the United States Tax Court.
Mr. Blanchet holds a B.A. degree, with highest distinction, from
the University of Southwestern Louisiana and a J.D., cum laude,
from Harvard Law School.
STEVEN B. TOON has been Chief Financial Officer of the
Company since October 6, 1997. Prior to joining the Company, Mr.
Toon provided consulting services to the Company, beginning in
June 1997. Since 1995 he engaged in private consulting/CPA
practice with various clients in the energy and services sectors
in Houston. During the last six months of 1994, he served as
Chief Financial Officer of Xavier Mines, Ltd. He was Chief
Financial Officer of Lend Lease Trucks, Inc. prior to the sale of
its assets to Ryder System Inc. in mid-1994. From 1977 until
1992, Mr. Toon served as Vice President Finance and Treasurer of
United Energy Resources, Inc. and United Gas Pipe Line Company.
From 1971 to 1977, he was a Vice President in Bank of America's
World Banking Division. Mr. Toon holds a B.B.A. degree from the
University of Houston, an M.B.A. degree from California State
University, Fullerton and is a certified public accountant
RICHARD K. KENNEDY is Vice President of Engineering and
responsible for certain engineering aspects of the Company's oil
and gas operations. From 1987, until he joined the Company in
1989, he was an operations engineer for Wintershall Corporation.
From 1981 to 1986 he was with Borden Energy, originally as a
petroleum engineer and later as regional operations manager.
From 1979 to 1981, Mr. Kennedy was employed with Marathon Oil
Company as a reservoir engineer, then as a drilling engineer. He
was employed with Shell Oil Company as a petroleum engineer and
reservoir engineer from 1977 to 1979. Mr. Kennedy graduated from
Louisiana Tech University with a B.S. degree in petroleum
engineering. He is a registered professional engineer in the
State of Louisiana and a member of the Society of Petroleum
Engineers.
R. CARTER CLINE is Vice President-Land, having joined the
Company in October 1990. He has over 20 years of exploration and
management experience. From 1982, until joining the Company, he
was employed by Pacific Enterprises Oil Company (USA), successor
by merger to Sabine Corporation, as East Gulf Coast Regional Land
Manager in Houston, Texas. From 1979 to 1982, he served as Vice
President-Land for Dynamic Exploration, Inc. in Lafayette,
Louisiana. From 1974 to 1979, he served as Region Landman in
Dallas and Division Land Manager in Houston, Texas, for Sabine
Corporation, and from 1971 to 1974 was employed by Getty Oil
Company in Houston, Texas and New Orleans, Louisiana. Mr. Cline
holds a B.B.A. degree in Petroleum Land Management from the
University of Texas at Austin and is a Certified Petroleum
Landman.
HERBERT F. HAMILTON is Vice President Operations of XCL-
China, having joined the Company in 1995. Mr. Hamilton has more
than 30 years of experience in the fields of engineering,
construction, construction management and consulting on heavy
civil works, offshore platforms, submarine pipelines and
construction equipment in over 35 countries. From 1990 to 1993,
Mr. Hamilton served as Senior Project Manager for Earl and
Wright in Houston, Texas. From 1993 to 1994, he served as
President and a consultant to Planterra, Inc. in Houston, Texas
and from 1994 until joining the Company he was an independent
consultant. Mr. Hamilton is a Registered Professional Engineer
and holds a B.S. in Architectural Engineering from the
University of Texas at Austin.
JOHN H. HASLAM is Treasurer, having joined the Company in
1990. From 1988 until joining the Company, he was employed by
United Gas Pipeline as Credit Manager. From 1986 to 1988, he
served as Director of Internal Audit for TransAmerican Natural
Gas Corporation. From 1981 to 1986 he was the Audit Manager for
ENSTAR Corporation. He was with Getty Oil from 1963 until 1981,
as Audit Manager of Joint Venture Operations and various other
accounting positions. Mr. Haslam holds a B.B.A. degree in
Marketing from Baylor University.
LISHA FALK is corporate Secretary, having joined the Company
in 1981. Since joining the Company Ms. Falk has served in various
administrative positions, most recently as Assistant Secretary.
R. THOMAS FETTERS, JR. is an independent oil and gas
consultant. He has over 25 years of exploration, production and
management experience, both domestic and foreign. From 1995 to
1997 Mr. Fetters was Senior Vice President of Exploration of
National Energy Group, Inc., Dallas, Texas, and from February
1990, until September 1995, he was Vice President of Exploration
of XCL Ltd., and President of XCL-China Ltd. During 1989, until
joining the Company, he served as Chairman and Chief Executive
Officer of Independent Energy Corporation. From 1984 to 1989, he
served as President and Chief Executive Officer of CNG Producing
Company in New Orleans, Louisiana, and from 1983 to 1984 as
General Manager of the Planning and Technology Division of
Consolidated Natural Gas Service Co. in Pittsburgh, Pennsylvania.
From 1966 to 1983, he served in various positions, from Geologist
to Exploration Manager, with several divisions of Exxon,
primarily in the Gulf Coast region of the U.S. and
internationally, in Malaysia and Australia. Mr. Fetters holds
B.S. and M.S. degrees in geology from the University of
Tennessee.
FRED HOFHEINZ is an attorney at law in Houston, Texas. From
1984 to 1987, he served as President of Energy Assets
International Corporation, a fund management company, now a
subsidiary of Torch Energy Advisors, serving as a consultant to
Torch Energy Advisors until 1989. Mr. Hofheinz also served as the
Mayor of Houston, Texas from 1974 to 1978. He, along with his
family, developed the Astrodome in Houston, and owned the Houston
Astros baseball team until 1974. He is founder and director of
United Kiev Resources, Inc., an oil and gas production company
operating in the Republic of the Ukraine in the name of its
wholly-owned subsidiary, Carpatsky Petroleum Company. Mr.
Hofheinz earned a Ph.D. degree in Economics from the University
of Texas and his law degree from the University of Houston. He
was appointed as a director by the Board at a meeting held March
21, 1991.
ARTHUR W. HUMMEL, JR., a director since April 1994, is the
former U.S. Ambassador to the People's Republic of China during
the period 1981 to 1985. Since his 1985 retirement from the
State Department, after 35 years of service, he has been active
in consulting with firms doing business in East Asia, and
participating in academic and scholarly conferences in the U.S.
and in the East Asia region. He is a member and trustee of many
academic, business, and philanthropic organizations involved in
international affairs.
Mr. Hummel was born in China. After education in the U.S.
he returned to China prior to Pearl Harbor. Interned by the
Japanese, he escaped and fought with Chinese guerrillas behind
the Japanese lines in north China until the end of the war.
He obtained an M.A. (Phi Beta Kappa) in Chinese studies from
the University of Chicago in 1949, and joined the State
Department in 1950. His early foreign assignments include Hong
Kong, Japan and Burma. He was Deputy Director of the Voice of
America in 1961-1963; Deputy Chief of Mission of the American
Embassy in Taiwan, 1965-1968; Ambassador to Burma, 1968-1970;
Ambassador to Ethiopia, 1975-1976; Ambassador to Pakistan, 1977-
1981; and Ambassador to the Peoples Republic of China, 1981-1985.
He was Assistant Secretary of State for East Asia 1976-1977. He
has received numerous professional awards from within and outside
the Government.
SIR MICHAEL PALLISER, a director since April 1994, was from
1984 to 1993 Chairman of Samuel Montagu & Co. Limited, the London
merchant bank which was owned by Midland Bank, of which he was
Deputy Chairman from 1987 to 1991, and which is now part of the
Hong Kong & Shanghai Banking Corporation. He was Vice Chairman
of Samuel Montagu from 1993 to 1996. He is a former Director of
BAT Industries, Bookers, Eagle Star, Shell and United Biscuits.
In 1947, he joined the British Diplomatic Service and served
in a variety of overseas and Foreign Office posts before becoming
head of the Planning Staff in 1964-1966, Private Secretary to the
Prime Minister, 1966-1969, Minister in the British Embassy in
Paris, 1969-1971, and the British Ambassador and Permanent
Representative to the European Communities in Brussels from 1971-
1975. He was, from 1975 until his retirement in 1982, Permanent
Under-Secretary of State in the Foreign and Commonwealth Office,
and Head of the Diplomatic Service. From April to July 1982, he
was a special adviser to the Prime Minister in the Cabinet Office
during the Falklands War. He was appointed a Member of the Privy
Council in 1983. Effective December 31, 1995, Mr. Palliser
resigned as President of the China-Britain Trade Group and a
director of the UK-Japan 2000 Group, and effective February 29,
1996, he resigned as Deputy Chairman of British Invisibles. Mr.
Palliser is also a former member of the Trilateral Commission and
director of the Royal National Theatre. He is currently Chairman
of the Major Projects Association, designed to assist in and for
the handling of major industrial projects. Mr. Palliser also
serves as Vice-Chairman of the Salzburg Seminar, a center for
intellectual exchange based in Middlebury, Vermont, with its
conference center in Salzburg, Austria.
Sir Michael Palliser was educated at Wellington College and
Merton College, Oxford. He saw wartime service in the British
Army with the Coldstream Guards.
FRANCIS J. REINHARDT, JR., is a partner in the New York
investment banking firm of Carl H. Pforzheimer & Co. Mr.
Reinhardt has been a partner in the firm for over 30 years and
has held various positions, specializing in independent oil and
gas securities, mergers and acquisitions, placements
participation and institutional sales since 1956. Mr. Reinhardt
holds a B.S. degree from Seton Hall University and received his
M.B.A. from New York University. Mr. Reinhardt is a member of
the New York Society of Security Analysts, a member of and has
previously served as president of the Oil Analysts Group of New
York, a member and past president of the National Association of
Petroleum Investment Analysts and a member of the Petroleum
Exploration Society of New York. Mr. Reinhardt also serves as a
director of Mallon Resources Corporation, a Nasdaq traded
petroleum and mining company, as well as several privately held
companies. Mr. Reinhardt was appointed as a director of the
Company at a Board meeting held December 11, 1992.
Compliance with Section 16(a) Filing Requirements
- -------------------------------------------------
To the Company's knowledge, instances of failure to file
reports with respect to reportable transactions during the year
ended December 31, 1997, as required by Section 16(a) of the
Exchange Act are as follows:
Reports Number of Known Failure Number of
Reporting Person File Late Transactions to File Form Transactions
---------------- --------- ------------ ------------ ------------
Lisha C. Falk Form 3 1 -- --
R. Thomas Fetters, Jr. Form 4 1 -- --
Richard K. Kennedy Form 3 1 -- --
Marsden W. Miller, Jr. Form 4 1 -- --
Michael Palliser Form 4 1 -- --
Francis J. Reinhardt, Jr. Form 4 1 -- --
Steven B. Toon Form 3 1 -- --
All other reporting persons who are officers or directors of
the Company have provided the Company with written
representations that no Form 5 filing was required in that all
reportable transactions were timely filed on the appropriate
forms.
Item 11. Executive Compensation.
The following table sets forth information regarding the
total compensation of the Chief Executive Officer and each of the
four most highly compensated executive officers of the Company at
the end of 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/her respective office
throughout the entire fiscal year.
</TABLE>
<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 non-qualified stock options for shares of Common
Stock and the second line reflects non-qualified stock
options for shares of Amended Series A Preferred Stock.
(4) XCL-China Ltd. is a wholly-owned subsidiary of the Company
which manages the Company's operations in China.
(5) Mr. Hamilton commenced employment with the Company on April
24, 1995. As part of his employment package he was awarded
options to purchase 13,333 shares of Common Stock (adjusted
to give effect to the Reverse Stock Split).
Stock Options
- -------------
The Company currently maintains one stock option plan which
was adopted by shareholders in 1992. All of the option plans are
administered by the Compensation Committee and provide for the
granting of options to purchase shares of Common Stock to key
employees and directors of the Company, and certain other persons
who are not employees of the Company but who from time to time
provide substantial advice or other assistance or services to the
Company.
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 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 (hereinafter, the "1997 LTSIP
Restatement"), 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
----------------------
As described above, prior to June 1, 1997, the Company
maintained the 1992 LTSIP, previously approved by shareholders,
which was initially effective on June 2, 1992, for employees and
certain other individuals connected with the Company or its
affiliates, pursuant to which options to purchase 679,671 shares
of Common Stock were outstanding, leaving only 420,328 shares
available for stock option grants (as adjusted for the Reverse
Stock Split). The 1992 LTSIP did not contemplate the grant of
stock options to purchase shares of any issue of the Company's
Serial Preferred Stock or the grant of Appreciation Options.
On June 5, 1997, the Board of Directors unanimously approved
the 1997 LTSIP Restatement, effective as of June 1, 1997, which
was subsequently approved by shareholders on December 17, 1997.
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 in common
with the 1992 LTSIP previously approved by shareholders, 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.
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 December 31,
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 following tables set forth, for those persons named in
the "Summary Compensation Table," information on stock options
granted during 1997 and all stock options outstanding as of
December 31, 1997, adjusted to reflect the Reverse Stock Split.
The closing price on the AMEX on June 2, 1997 for the Common
Stock was $0.21875 (which price is not adjusted to reflect the
Reverse Stock Split), and the fair market value of the Amended
Series A Preferred Stock, based upon last sales price information
in the Private Offering, Resales and Trading through Automated
Linkage ("PORTAL") Market of the National Association of
Securities Dealers, Inc. as supplied by Jefferies, was $85.00 on
June 2, 1997. Mr. Miller's Appreciation Option (described below)
is not included because of the indeterminate nature of the Award.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
____________________________
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Granted to
Options/ Employees in Exercise or
SARs Fiscal Base Price Expiration
Name Granted(#) Year ($/Share) Date 0% ($) 5%($) 10%($)
---- ---------- ---------- ---------- ----------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- -- --
*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, and
as to 44,444 shares on June 1, 2001. Such Amended Series A
Preferred Stock NSO is exercisable as follows: as to 1,250
shares on June 1, 2000; as to 1,750 shares on June 1, 2001; and
as to 2,000 shares on June 1, 2002. Mr. Chandler's Common Stock
NSO and his Amended Series A Preferred Stock NSO will each expire
on June 1, 2007 or, if earlier, the date his employment is
terminated by the Company for cause or the date he voluntarily
terminates his employment without good reason.
(3) Effective June 1, 1997, Danny M. Dobbs was granted an
NSO to purchase 400,000 shares of Common Stock (adjusted for the
Reverse Stock Split) for an option exercise price (adjusted for
the Reverse Stock Split) of $3.75 per share (aggregate purchase
price of $1,500,000) and an NSO to purchase 25,000 shares of
Amended Series A Preferred Stock for an option exercise price of
$85.00 per share (aggregate purchase price of $2,125,000). Such
Common Stock NSO is exercisable as follows: as to 133,334 shares
on June 1, 1999; as to 133,333 shares on June 1, 2000; and as to
133,333 shares on June 1, 2001. Such Amended Series A Preferred
Stock NSO is exercisable as follows: as to 6,250 shares on June
1, 2000; as to 8,750 shares on June 1, 2001; and as to 10,000
shares on June 1, 2002. Mr. Dobbs' Common Stock NSO and his
Amended Series A Preferred Stock NSO will each expire on June 1,
2007 or, if earlier, the date his employment is terminated by the
Company for cause or the date he voluntarily terminates his
employment without good reason.
(4) Effective June 1, 1997, Mr. Richard Kennedy was granted
an NSO to purchase 266,666 shares of Common Stock (adjusted for
the Reverse Stock Split) at an exercise price (adjusted for the
Reverse Stock Split) of $3.75 per share (aggregate purchase price
of approximately $1,000,000), and an NSO to purchase 5,000 shares
of Amended Series A Preferred Stock at an exercise price of
$85.00 per share (aggregate purchase price of $425,000). Such
Common Stock NSO is exercisable as follows: as to 88,890 shares
on June 1, 1999; as to 88,888 shares on June 1, 2000; and as to
88,888 shares on June 1, 2001. Mr. Kennedy's Common Stock NSO
will expire on June 1, 2007 or, if earlier, the date his
employment is terminated by the Company for cause or the date he
voluntarily terminates his employment without good reason. Such
Amended Series A Preferred Stock NSO is exercisable as follows:
as to 1,250 shares on June 1, 2000; as to 1,750 shares on June 1,
2001; and as to 3,000 shares on June 1, 2002. Mr. Kennedy's
Amended Series A Preferred Stock NSO will expire on August 1,
2007 or, if earlier, the date his employment is terminated by the
Company for cause or the date he voluntarily terminates his
employment without good reason.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised in-the-Money
on Value Options/SARs at Options/SARs
Name Exercise Realized Fiscal Year-End(#) Fiscal Year-End($)(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 Long Term
Stock Incentive Plan at December 31, 1997.
(3) Represents the aggregate number of five-year stock purchase
warrants, received (a) upon surrender of an employment
agreement with the Company, determined based upon a formula
whereby each of the individuals was to be offered a warrant,
based upon the length of time of employment with the
Company, for a maximum of two shares of Common Stock for
each dollar of compensation remaining to be paid to such
individual under his agreement (based upon the product of
his highest monthly base salary and the number of months
remaining under his contract), at an exercise price of
$18.75 per share, and (b) for each dollar of salary
reduction for the 15-month period commencing January 1, 1993
through March 31, 1994, as based on the same formula and at
the same exercise price used in the granting of warrants
upon surrender of employment agreements. See "Employment
Agreements; Termination of Employment and Change-in-Control
Arrangements" below.
(4) At December 31, 1997, the Company's Common Stock price was
lower than the option and/or warrant exercise prices (as
adjusted to reflect the Reverse Stock Split) with the
exception of options granted effective June 1, 1997.
(5) At December 31, 1997, the Company's Amended Series A
Preferred Stock price was equal to the option exercise
price.
These options were all awarded under the Company's Stock
Option Plans described above.
Appreciation Option for M.W. Miller, Jr.
Pursuant to the 1997 LTSIP Restatement the Board approved
an Appreciation Option for M. W. Miller, Jr. which was approved
by shareholders at the December 17, 1997 Special Meeting of the
Shareholders. The Board determined that the Appreciation Option
to M. W. Miller, Jr. was in the best interests of the Company and
its shareholders, and is required in order to retain the services
of Mr. Miller, who has been instrumental in developing the
Company's China activities and in successfully concluding the
Company's offerings of Amended Series A Preferred Stock and
Senior Secured Notes. 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, the aggregate
market capitalization of the Company was $161,547,223. Upon
exercise of his Option, in the event the Company elects to settle
the Option with shares of Stock, Mr. Miller must pay the Company
twenty percent (20%) of the amount he is entitled to receive upon
exercise of the Appreciation Option (before any reduction as
hereinafter set forth), or any increment thereof, up to an
aggregate maximum of $5 million (the "Exercise Price") in cash.
In the event the Company elects to settle the Option in cash, the
amount of cash Mr. Miller will receive will be reduced by the
amount of the Exercise Price. Because Mr. Miller's Appreciation
Option contemplates compensation determined with reference to
increases in the Company's market capitalization without
restriction, there is no effective limit on the amount of
compensation which may become payable thereunder. Mr. Miller may
exercise his Appreciation Option as of any June 1 or December 1
commencing June 1, 2002, upon 45 days written notice, in whole or
in 10% increments. In the event that Mr. Miller exercises his
Appreciation Option for less than the total amount available
thereunder, the percentage increment as to which it is exercised
will cease to be available to create additional compensation
opportunity for Mr. Miller based upon subsequent appreciation in
the Company's market capitalization. Mr. Miller's Appreciation
Option expires on June 1, 2007 and will remain exercisable at any
time prior to such expiration notwithstanding his termination of
employment with the Company unless such employment is terminated
by the Company for "cause" or is terminated by Mr. Miller without
"good reason." In keeping with the provisions of the 1997 LTSIP
Restatement discussed in "1997 LTSIP Restatement - Change of
Control Provisions," in the event of a "change in control of XCL"
the Appreciation Option will become immediately exercisable and
the Company will be obligated to pay Mr. Miller, in cash, upon
any exercise of his Appreciation Option, at least 40% of the net
amount payable. This obligation may impede the consummation of a
change of control of the Company.
Certain Federal Income Tax Effects
- ----------------------------------
The following is a general summary of the principal federal
income tax effects to the Company under current law of the
various awards which may be granted under the 1997 LTSIP
Restatement. These descriptions do not purport to cover all
potential tax consequences.
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), limits deductibility of certain
compensation for the Company's Chief Executive Officer and the
additional four executive officers of the Company who are highest
paid and employed at year end to $1 million per year unless
certain conditions are met which result in compensation being
characterized as "performance-based." Awards under the Plan will
not satisfy the conditions necessary to cause the compensation
earned under them to qualify as "performance-based" compensation,
which is not subject to the deductibility limit of Section 162(m)
of the Code. It is the position of the Board of Directors that
the approach necessary for the design of incentive compensation
that will satisfy the criteria under Section 162(m) of the Code
would compromise the best interests of the Company and its
shareholders.
Certain provisions in the 1997 LTSIP Restatement may afford
the recipient of an Award under the 1997 LTSIP Restatement with
special protections or payments which are contingent upon a
change in the ownership or effective control of the Company or in
the ownership of a substantial portion of the Company's assets.
To the extent that they are triggered by the occurrence of any
such event, these special protections or payments may constitute
"parachute payments" which, when aggregated with other "parachute
payments" received by the recipient, could result in the
recipient receiving "excess parachute payments." The Company
would not be allowed a deduction for any such "excess parachute
payments" and the recipient of such "excess parachute payments"
would be subject to a nondeductible 20% excise tax upon such
payments in addition to income tax otherwise owed with respect to
such payments.
Section 401(k) Plan
- -------------------
In 1989, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code for the benefit of
employees meeting certain eligibility requirements. The Company
has obtained a favorable determination from the Internal Revenue
Service regarding the tax-favored status of this plan. Employees
can contribute up to 10% of their compensation. The Company, at
its discretion and subject to certain limitations, may contribute
up to 75% of the contributions of each participant. The Company
did not make any contributions to the 401(k) Plan in 1997.
Compensation of Directors and Other Arrangements
- -------------------------------------------------
The Company reimburses its directors for travel and lodging
expenses incurred in attending meetings of the Board of
Directors. Effective January 1, 1990, directors (other than
Messrs. Hummel and Palliser and those directors who are officers
of the Company) were paid an annual retainer of $18,000 plus a
fee of $1,000 for each Board meeting attended. In addition, such
directors were paid a fee of $1,000 for each committee meeting
attended.
In April 1994, the Company entered into separate consulting
agreements with Messrs. Hummel and Palliser, upon their becoming
directors. Each of the agreements is terminable by either of the
parties thereto upon written notice and provides that the
individuals will render consulting services to the Company in
their respective areas of expertise. Pursuant to the terms of
the agreements, each of those directors receives compensation at
the rate of $50,000 per annum, which includes the compensation
they would otherwise be entitled to receive as directors and for
attending meetings of the Board. In addition, pursuant to the
terms of the 1992 LTSIP, Messrs. Hummel, Palliser, Reinhardt and
Hofheinz, each a non-employee director, were each granted stock
options for 6,666 shares of Common Stock exercisable at prices
ranging from $18.75 to $31.59 per share (adjusted for the Reverse
Stock Split).
In June 1997, the Company entered into a consulting
agreement with Mr. Fetters, a director of the Company. The
agreement is for a one-year term ending July 31, 1998, to
continue thereafter on a month to month basis. The agreement may
be terminated by either party on thirty days written notice.
Pursuant to the terms of the agreement, Mr. Fetters is to consult
with the Company on all aspects of the Company's exploration,
development and production projects. For his services Mr. Fetters
is to receive $30,000 per annum, which is in addition to the
compensation he receives as a director for attending meetings of
the Board. In addition to the above compensation, Mr. Fetters is
entitled to receive a finder's fee on certain specifically
identified projects.
Effective June 1, 1997, Messrs. Hummel, Palliser, Reinhardt,
Hofheinz and Fetters were each granted nonqualified stock options
to purchase 66,666 shares of Common Stock (adjusted for the
Reverse Stock Split) exercisable at $3.75 (adjusted for the
Reverse Stock Split) per share under the 1997 LTSIP Restatement.
See "Stock Options - 1997 LTSIP Restatement - Awards to
Management" herein.
Benjamin B. Blanchet, in his capacity as Executive Vice
President, is entitled to a salary of $80,000 per year for up to
80 hours per month of services.
Effective August 1, 1997, the Company entered into a
Services Agreement with Mr. Blanchet. The Agreement is
terminable by either party at any time without cause. Under the
Agreement, Mr. Blanchet is engaged to act as counsel to the
Company to perform from time to time such services as the Company
may request of him in that capacity. In general, compensation
for services under the Services Agreement will be at the rate of
$175 per hour for up to 80 hours per month. Also, under the
Services Agreement, the Company has agreed to provide Mr.
Blanchet with office space, supplies, secretarial assistance, a
library allowance, professional liability insurance,
reimbursement for continuing legal education expenses and bar
dues. Under the Services Agreement, Mr. Blanchet may, except as
prohibited by law or the Louisiana Rules of Professional
Responsibility, represent other clients and engage in business
for his own account.
In connection with his employment by the Company, Mr.
Blanchet received from the Company a $100,000 loan to replace
benefits that he forfeited when he withdrew as a partner of
Gordon, Arata, McCollam & Duplantis, L.L.P. to become Executive
Vice President of the Company. The loan is to be repaid over
eight years from annual bonus payments equal to interest, at the
rate of 6.5% per annum, plus one-eighth of the original principal
balance to be paid by the Company to Mr. Blanchet each year and
shall be forgiven in its entirety if (i) the Company shall fail
to pay timely any such bonus payment, shall breach the Services
Agreement or shall terminate his employment without "cause" or
(ii) Mr. Blanchet terminates his employment with "good reason,"
in either case as such terms are defined in the note evidencing
such loan.
Effective August 1, 1997, Benjamin B. Blanchet was granted
an NSO to purchase 400,000 shares of Common Stock for an option
exercise price of $3.75 per share (aggregate purchase price of
$1,500,000.00). Such Common Stock NSO is exercisable as to
133,334 shares on August 1, 1999; as to 133,333 shares on August
1, 2000 and as to 133,333 shares on August 1, 2001. On that same
date Mr. Blanchet was granted an NSO to purchase 25,000 shares of
Amended Series A Preferred Stock for an option exercise price of
$85.00 per share (aggregate purchase price of $2,125,000). Such
Amended Series A Preferred Stock NSO is exercisable as to 6,250
shares on August 1, 2000; as to 8,750 shares on August 1, 2001
and as to 10,000 shares on August 1, 2002. Mr. Blanchet's NSOs
will expire on August 1, 2007 or, if earlier, the date his
employment is terminated by the Company for cause or the date he
voluntarily terminates his employment without good reason.
During 1997 all regular employees were provided health
insurance, a portion of the premium for which is paid by the
Company, and life and disability insurance based upon a factor of
the employee's base salary.
Employment Agreements; Termination of Employment and
- ----------------------------------------------------
Change-in-Control Arrangements
- ------------------------------
Effective April 1, 1994, Messrs. M.W. Miller, Jr., J.T.
Chandler, D.M. Dobbs, and R.C. Cline, in their capacities as
executive and administrative officers of the Company and its
various subsidiaries, agreed to surrender their employment
agreements in consideration of the issuance of five-year warrants
to purchase Common Stock at an exercise price of $18.75 per share
(adjusted for the Reverse Stock Split), subject to customary anti-
dilution adjustments. The number of warrants issued to such
individuals was determined based upon a formula whereby each of
the individuals was offered a warrant to purchase, based upon the
length of time of employment with the Company, a maximum of two
shares of Common Stock for each dollar of compensation remaining
to be paid to such individual under his agreement (based upon the
product of his highest monthly base salary and the number of
months remaining under his agreement). Accordingly, Mr. Miller
received warrants to purchase 125,000 shares; Mr. Chandler,
68,333 shares; Mr. Dobbs, 38,333 shares; and Mr. Cline, 16,666
shares, all adjusted for the Reverse Stock Split.
Effective January 1, 1989, the Company adopted a policy
addressing severance upon separation from the Company. Under
this policy benefits due upon a change-in-control as therein
defined range from three months salary for employees with less
than one year of service to 24 months salary for employees with
more than 10 years of service.
Report on Repricing of Options/SARs
- -----------------------------------
During the fiscal year ended December 31, 1997, there were
no repricings of stock options awarded to any of the named
executive officers.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
For the year ended December 31, 1997, the following
nonexecutive directors of the Company, served as members of the
Compensation Committee of the Board of Directors: Messrs. M.
Palliser, A.W. Hummel, Jr., F. Hofheinz (Chairman) and F.J.
Reinhardt, Jr. None of the members of the Compensation Committee
were formerly, nor are any members currently, officers or
employees of the Company or any of its subsidiaries.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors
("Committee") establishes the general compensation policies of
the Company, establishes the compensation plans and specific
compensation levels for executive officers and certain other
managers, and administers the Stock Option Plans and Long Term
Stock Incentive Plan. The Committee currently consists of four
independent, nonemployee directors: Messrs. F. Hofheinz, who
serves as Chairman, M. Palliser, Arthur W. Hummel, Jr. and
Francis J. Reinhardt, Jr.
Compensation Policies and Philosophy
- ------------------------------------
The Committee has determined that the compensation program
of the Company should not only be adequate to attract, motivate
and retain executives, key employees and other individuals who
the Company believes may make significant contributions to the
Company's results, but should also be linked to the value
delivered to shareholders as reflected in the price of the
Company's Common Stock.
The Committee believes that the cash compensation of
executive officers, as well as other key employees, should be
competitive with other similarly situated companies while, within
the Company, being fair and discriminating on the basis of
personal performance. In general, in establishing total cash
compensation for its executives, the Committee has taken into
account the median cash compensation of executives employed by
competitors including some of the companies reflected in the peer
group identified in the Performance Graph set forth below, which
the Committee believes represent the Company's most direct
competition for executive talent. The Committee receives
recommendations from management as to executive compensation and,
in light of the Company's performance and the economic conditions
facing the Company, determines appropriate compensation levels
for recommendation to the Board of Directors. The Committee does
not assign relative weights to individual factors and criteria
used in determining executive compensation and does not use
quantifiable targets in determining compensation. For 1997, the
Company did not retain the services of a compensation consulting
firm.
Awards of stock options are intended both to retain
executives, key employees and other individuals who the Company
believes may make significant contributions to the Company's
results and to motivate them to improve long-term stock market
performance. Options are granted at or above the prevailing
market price and will have value only if the price of the
Company's Common Stock increases.
Effective January 1, 1994, Section 162(m) of the Internal
Revenue Code of 1986 (the "Code") generally denies a tax
deduction to any publicly held corporation for compensation that
exceeds $1 million paid to certain senior executives in a taxable
year, subject to an exception for "performance-based
compensation" as defined in the Code and subject to certain
transition provisions. Gains on the exercise of nonqualified
stock options granted through December 31, 1994, will be tax
deductible under the transition rules. Restricted stock awards
by definition granted after February 17, 1993, are not
deductible. At present the Committee does not intend to recommend
amendment to the Stock Option Plans to meet the restrictive
requirements of the Code.
The Committee believes that annual incentive awards should
be commensurate with performance. It further believes that in
order to meet this objective it needs to have the ability to
exercise its judgment or discretion to evaluate performance
against qualitative criteria. It is the Committee's opinion that
the benefits to the Company of the use of a qualitative approach
to the compensation of senior executives such as the Chairman
outweigh the nonmaterial loss of a portion of the deductions
associated with that compensation.
In recognition of the efforts and sacrifices of management
that had enabled the Company in mid-1997 to be on track to meet
its 1997 goals, the need to retain existing management and the
need to attract qualified and competent personnel, in June 1997,
the Board of Directors reassessed the need for adjusting
management's compensation to provide for additional incentives to
management. As a result of this reassessment, the Board of
Directors approved amendments to and a restatement of the
Company's 1992 LTSIP subject to shareholders approval, which was
obtained on December 17, 1997. These amendments generally made
available to the Committee the authority to grant Awards to
executives employed by the Company entitling such executives to
acquire shares of the Company's Preferred Stock and Common Stock.
They also made available to the Committee the authority to grant
appreciation awards. As described in greater detail in "Awards
to Management," the Board of Directors made, subject to the
approval of the shareholders of the Company, which was obtained
on December 17, 1997, certain Awards under the 1997 LTSIP
Restatement effective as of June 1, 1997 (except for awards to
the CFO and an Executive Vice President which were effective
October 6 and August 1, 1997, respectively). The Committee
believes that the 1997 LTSIP Restatement and the Awards granted
thereunder effectively encourage retention and continuity of
management, appropriately reward management for its past
performance and align the interests of management with those of
the Company's shareholders by providing management with the
opportunity to share in the creation of the Company's value.
On December 17, 1997, the Committee reviewed the Company's
1997 financial results and 1997 nonfinancial goals and determined
that, in light of (i) the Company's continued successful drilling
results in the Zhao Dong Block in the Bohai Bay in China, (ii)
the fact that top officials in China's oil industry have
indicated that the Company will be offered additional exploration
and development rights in China and (iii) the Company's
successful placement in May 1997 of $100 million of Preferred
Stock and Notes, the proceeds of which allowed the Company to
commence achieving its objectives in China, the Company's
financial and operating goals for 1997 had been met and exceeded.
Company Performance and Chief Executive Officer Compensation
- ------------------------------------------------------------
The Committee, in connection with determining the
appropriate compensation for Marsden W. Miller, Jr. as Chief
Executive Officer ("CEO"), took into account the financial
condition of the Company, including its liquidity requirements.
It determined that the CEO had been successful in disposing of
assets and raising capital throughout the year. Taking into
consideration the performance of the CEO, as well as the
Company's current cash position and near term requirements, the
adoption of the 1997 LTSIP Restatement and the NSO and
Appreciation Option awarded to the CEO under the 1997 LTSIP
Restatement, the Committee decided that the 1997 awards should
serve in lieu of a cash salary increase or bonus to the CEO for
the present time.
Compensation of Other Executive Officers
- ----------------------------------------
The Committee, in consultation with the CEO, applied the
information and other factors outlined above in reviewing and
approving the compensation of the Company's other executive
officers.
December 17, 1997 COMPENSATION COMMITTEE
Fred Hofheinz, Chairman
Arthur W. Hummel
Michael Palliser
Francis J. Reinhardt, Jr.
Shareholder Return Performance Presentation
- -------------------------------------------
Set forth below is a line graph comparing the percentage
change in the cumulative total shareholder return on the
Company's Common Stock against the AMEX Market Value Index for
the years 1993 through 1997, with a peer group selected by the
Company for the past five fiscal years. The peer group consists
of the same independent oil and gas exploration and production
companies used in last year's comparison, namely: Alta Energy
Corporation; Amerac Energy Corporation (formerly Wolverine
Exploration Company); Bellwether Exploration Company; Brock
Exploration Corporation; Tom Brown, Inc.; Caspen Oil, Inc.;
Chemfirst Inc. (formerly First Mississippi Corporation); Cobb
Resources Corporation; Coda Energy, Inc.; Comstock Resources,
Inc.; Crystal Oil Company; DeKalb Energy Company; Edisto
Resources Company; Energen Corporation; Forest Oil Corporation;
Geodyne Resources, Inc.; Global Natural Resources, Inc.; Goodrich
Petroleum Corporation (formerly Patrick Petroleum Company);
Hallador Pete Company; Hondo Oil & Gas Company; Kelley Oil & Gas
Partners; Louis Dreyfus Natural Gas (formerly American
Exploration Company); Magellan Petroleum Corporation; Maynard Oil
Company; Monterey Resources, Inc. (formerly McFarland Energy,
Inc.); MSR Exploration Limited; Numac Energy, Inc.; Pacific
Enterprises; Penn Virginia Corporation; Plains Resources, Inc.;
Presidio Oil; Wainoco Oil Corporation; Wichita River Oil; and
Wiser Oil Company. The relevant information with respect to the
peer group was furnished by Standard & Poors Compustat Service.
The graph assumes that the value of the investment in the
Company's Common Stock and the peer group stocks were $100 on
January 1, 1992 and that all dividends were reinvested.
[SHAREHOLDER RETURN PERFORMANCE GRAPH]
1993 Return 1994 Return 1995 Return 1996 Return 1997 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
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
Security Ownership of Certain Beneficial Owners
- ------------------------------------------------
The following table sets forth as of March 31, 1998, the
individuals or entities known to the Company to own more than
5 percent of the Company's outstanding shares of voting
securities. As of that date there were 22,926,333 shares of
Common Stock, excluding 69,471 shares held as treasury stock;
and 1,129,453 shares of Amended Series A Preferred Stock and
47,085 shares of 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
1114 Avenue of the Americas
New York, New York 10036 2,900,228 (4) 11.28 214,909 19.03 -- --
KAIM Non-Traditional, L.P.
1800 Avenue of the Stars,
2nd Floor
Los Angeles, California 90026 4,858,366(4)(5) 18.08 311,908 (6) 27.62 47,085 100
Mitch Leigh
29 West 57th Street
New York, New York 10019 1,938,416 (4)(7) 8.33 -- -- -- --
Marsden W. Miller, Jr.
110 Rue Jean Lafitte, 2nd Floor
Lafayette, Louisiana 70508 1,665,713 (4)(8) 7.11 -- -- -- --
</TABLE>
______________
(1) This table includes shares of Common Stock issuable upon
conversion of the shares of Amended Series A Preferred
Stock. Each share of Amended Series A Preferred Stock is
convertible into approximately 11 shares of Common Stock.
(2) The holders of Amended Series A Preferred Stock are entitled
to cast the same number of votes as the shares of Common
Stock then issuable upon conversion thereof (currently 11
votes) on any matter subject to the vote of Common
Stockholders.
(3) Each share of Amended Series B Preferred Stock is
convertible into approximately 26.3 shares of Common Stock,
if the Common Stock issuable on conversion has not been
registered and 21 shares of Common Stock, if the Common
Stock issuable on conversion has been registered, subject to
adjustment, on or after August 31, 1998. Each share of
Amended Series B Preferred Stock is entitled to 50 votes per
share.
(4) Includes shares issuable upon the exercise of outstanding
stock purchase warrants exercisable within the next 60 days.
(5) Includes 16,874 shares owned by Richard A. Kayne, a
director, CEO and President of Kayne Anderson Investment
Management, Inc., the general partner of KAIM Non-
Traditional, L.P. ("KAIM LP"). The shares over which Mr.
Kayne has sole voting and dispositive power are held by him
directly or by accounts for which he serves as trustee or
custodian. The shares over which Mr. Kayne and KAIM LP have
shared voting and dispositive power are held by accounts for
which KAIM LP serves as investment adviser (and, in some
cases as general partner). KAIM LP disclaims beneficial
ownership of these shares, except to the extent that they
are held by it or attributable to it by virtue of its
general partner interests in certain limited partnerships
holding such shares. Mr. Kayne disclaims beneficial
ownership of the shares reported, except those shares
attributable to him by virtue of his limited and general
partner interests in such limited partnerships and by virtue
of his indirect interest in the interest of KAIM LP in such
limited partnerships.
(6) Includes 2,610 shares owned by Richard Kayne, a director,
CEO and President of Kayne Anderson Investment Management,
Inc., the general partner of KAIM Non-Traditional, L.P.
("KAIM LP") The shares over which Mr. Kayne has sole voting
and dispositive power are held by him directly or by
accounts for which he serves as trustee or custodian. The
shares over which Mr. Kayne and KAIM LP have shared voting
and dispositive power are held by accounts for which KAIM LP
serves as investment adviser (and, in some cases as general
partner). KAIM LP disclaims beneficial ownership of these
shares, except to the extent that they are held by it or
attributable to it by virtue of its general partner
interests in certain limited partnerships holding such
shares. Mr. Kayne disclaims beneficial ownership of the
shares reported, except those shares attributable to him by
virtue of his limited and general partner interests in such
limited partnerships and by virtue of his indirect interest
in the interest of KAIM LP in such limited partnerships.
(7) Includes 104,132 shares owned by Mr. Leigh's wife. Does not
include shares and warrants held in custodial and trust
accounts for Mr. Leigh's minor children, which Mr. Leigh
does not control. Mr. Leigh disclaims beneficial ownership
of all shares held by his wife and minor children.
(8) Includes shares issuable upon the exercise of stock options
exercisable within the next 60 days; and 1,000,000 shares of
restricted stock subject to certain forfeiture provisions.
Security Ownership of Management
- --------------------------------
The following table sets forth information concerning the
shares of the Company's Common Stock owned beneficially by each
director of the Company, and all directors and executive officers
as a group as of March 15, 1998. As of that date there were
22,926,333 shares of Common Stock issued and outstanding,
excluding 69,741 shares of Common Stock held as treasury stock,
and 1,129,453 shares of Amended Series A Preferred Stock issued
and outstanding. The mailing address for all such individuals is
XCL Ltd., 110 Rue Jean Lafitte, 2nd Floor, Lafayette, Louisiana
70508.
<TABLE>
<CAPTION>
Common Stock Amended Series A Preferred Stock
_____________________________ ______________________________
Number Percent Number Percent
Name of Beneficial Owner of Shares of Class (7) of Shares of Class
- ------------------------ --------- ------------ --------- --------
<S> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1,665,713 (1)(2)(3)(4) 7.11 -- --
John T. Chandler 554,940 (1)(2)(3)(4) 2.40 20,000 (2) 0.02
Benjamin B. Blanchet 200 (5) -- -- --
Fred Hofheinz 6,666 (3) 0.03 -- --
Arthur W. Hummel, Jr. 6,666 (3) 0.03 -- --
Sir Michael Palliser 6,666 (3) 0.03 -- --
Francis J. Reinhardt, Jr. 40,798 (3)(6) 0.18 -- --
R. Thomas Fetters, Jr. 62,699 (4) 0.27 -- --
All directors and officers of
the Company as a group
(15 persons) 2,484,064 (3)(4) 10.83 20,000 (2) 0.02
</TABLE>
____________
(1) Includes 13,333 shares which are subject to an option
granted under agreement dated October 1, 1985 in favor of
John T. Chandler. Such shares are also included in Mr.
Chandler's holding inasmuch as the option is presently
exercisable. For purposes of the total holdings of the
group, the shares are included solely in Mr. Miller's share
holdings.
(2) Includes shares of restricted stock awarded to Messrs.
Miller and Chandler which are subject to certain forfeiture
provisions.
(3) Includes shares of Common Stock which may be acquired
pursuant to options which are exercisable within 60 days.
(4) Includes shares of Common Stock which may be acquired
pursuant to stock purchase warrants exercisable within 60
days.
(5) Represents shares of Common Stock owned by Mr. Blanchet's
children. Mr. Blanchet disclaims 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.
(7) Calculated taking into account the results of the Reverse
Stock Split.
Item 13. Certain Relationships and Related Transactions.
As a matter of policy the Company approves all transactions
involving insiders through the majority vote of disinterested
directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) The following documents are filed as a part of this report.
Financial Statements
- --------------------
The following documents are included in Part II, Item 8 of
this report:
Page
XCL Ltd. and Subsidiaries:
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1997 and
December 31, 1996
Consolidated Statement of Operations for each of the three years
in the period ended December 31,1997
Consolidated Statement of Shareholders' Equity for each of the
three years in the period ended December 31, 1997
Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1997
Notes to Consolidated Financial Statements
XCL-China Ltd. (wholly-owned):
Report of Independent Accountants
Balance Sheet as of December 31, 1997 and December 31,1996
Statement of Operations for each of the three years in the period
ended December 31, 1997
Statement of Shareholders' Equity for each of the three years in
the period ended December 31, 1997
Statement of Cash Flows for each of the three years in the period
ended December 31, 1997
Notes to Financial Statements
Financial Statement Schedules
- -----------------------------
Certain financial statement schedules are omitted because of
the absence of the conditions under which they are required.
XCL Ltd. and Subsidiaries:
Schedule II-Valuation and Qualifying Accounts
Executive Compensation Plans and Arrangements
- ---------------------------------------------
Form of Long Term Stock Incentive Plan as Amended and Restated
Effective as of June 1, 1997 - See Appendix C to Proxy Statement
dated November 20, 1997.
Form of Appreciation Grant Agreement between the Company and Mr.
M.W. Miller, Jr. - See Appendix D to Proxy Statement dated
November 20, 1997.
Form of Services Agreement dated August 1, 1997, between the
Company and Mr. Benjamin B. Blanchet, an officer of the Company.
- - See Exhibit 10.46 hereto.
Form of Promissory Note dated August 1, 1997, in a principal
amount of $100,000, made in favor of the Company by Mr. Benjamin
B. Blanchet, an officer of the Company. See Exhibit 10.47
hereto.
Form of Indemnification Agreement by and between the Company and
various officers and directors - See Appendix II to Proxy
Statement dated November 13, 1987.
Stock Option Agreement by and between the Company and Marsden W.
Miller, Jr. dated July 11, 1987 - See Appendix VIII to Proxy
Statement dated November 13, 1987.
Amended and Restated 1987 Incentive Stock Option and Stock Option
Plans - See Exhibit 4 to Current Report on Form 8-K filed
February 10, 1989.
Long Term Stock Incentive Plan between the Company and certain
employees - See Exhibit A to Proxy Statement dated May 11, 1992.
Consulting Agreement by and between the Company and Mr. R. Thomas
Fetters, Jr. dated June 1, 1997. - See Exhibit 10.44 hereto.
Consulting Agreement by and between the Company and Sir Michael
Palliser dated May 1, 1994. - See Exhibit 10.4 hereto.
Consulting Agreement by and between the Company and Mr. Arthur W.
Hummel. Jr. dated May l, 1994. - See Exhibit 10.5 hereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated October 3, 1997, was
filed to report (i) the test results of the Company's C-4 well on
the Zhao Dong Block, (ii) the release of funds held in escrow
from the May 20, 1997 Note Offering, and (iii) the sale of 24,000
shares of Common Stock through the exercise of stock purchase
warrants, pursuant to Regulation S under the Securities Act.
A Current Report on Form 8-K dated October 21, 1997, was
filed to report the sale of 100,000 shares of Common Stock
through the exercise of stock purchase warrants and the issuance
of an aggregate of 53,333 shares of Common Stock as compensation
to a resident of Taiwan, all pursuant to Regulation S under the
Securities Act.
(c) Exhibits required by Item 601 of Regulation S-K
(a) Exhibits required by Item 601 of Regulation S-K.
2.0 Not applicable
3(i) Articles of incorporation
3.1 Amended and Restated Certificate of Incorporation of the
Company dated December 17, 1998. *
3(ii) Amended and Restated Bylaws of the Company as currently
in effect. (A)(i) *
4.0 Instruments defining rights of security holders, including
indentures:
4.1 Forms of Common Stock Certificates. *
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 Foundatio 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. *
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. *
4.34 Certificate of Designation of Amended Series B, Cumulative
Convertible Preferred Stock dated March 4, 1998. *
4.35 Correction to Certificate of Designation of Amended Series
B, Cumulative Convertible Preferred Stock dated March 5,
1998. *
4.36 Second Correction to Certificate of Designation of Amended
Series B Preferred Stock dated March 19, 1998. *
10.0 - Material Contracts
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
Amount Price
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,
where in the Company sold its office building. (N)(viii)
10.25 Amendment No. 1 to the May 1, 1995 Agreement with
Apache Corp. dated April 3, 1997, effective December 13,
1996. (N)(ix)
10.26 Form of Guaranty dated April 9, 1997 by XCL-China Ltd.
in favor of ING (U.S.) Capital Corporation executed in
connection with the sale of certain Unsecured Notes issued
by XCL-China Ltd. (N)(x)
10.27 Form of First Amendment to Stock Pledge Agreement dated
April 9, 1997, between the Company and ING (U.S.) Capital
Corporation adding XCL Land Ltd. to the Stock Pledge
Agreement dated as of January 31, 1994. (N)(xi)
10.28 Form of Agreement dated April 9, 1997, between ING
(U.S.) Capital Corporation, XCL-China and holders of the
Senior Unsecured Notes, subordinating the Guaranty granted
by XCL-China in favor of ING to the Unsecured Notes.
(N)(xii)
10.29 Form of Forbearance Agreement dated April 9, 1997
between the Company and ING (U.S.) Capital Corporation.
(N)(xiii)
10.30 Form of a series of Unsecured Notes dated April 10,
1997, between the Company and the following entities:
Note Holder Principal Amount
Kayne Anderson Offshore, L.P. $200,000
Offense Group Associates, L.P. $500,000
Kayne Anderson Non-Traditional Investments, L.P. $500,000
Opportunity Associates, L.P. $400,000
Arbco Associates, L.P. $500,000
J. Edgar Monroe Foundation $100,000
Estate of J. Edgar Monroe $300,000
Boland Machine & Mfg. Co., Inc. $100,000
Construction Specialists, Inc. d/b/a Con-Spec, Inc. $500,000 (N)(xiv)
10.31 Form of Subscription Agreement dated April 10, 1997, by
and between XCL-China, Ltd., the Company and the subscribers
of Units, each unit comprised of $100,000 in Unsecured Notes
and 325,580 warrants. (N)(xv)
10.32 Form of Intercompany Subordination Agreement dated
April 10, 1997, between the Company, XCL-Texas, Ltd., XCL
Land Ltd., The Exploration Company of Louisiana, Inc., XCL-
Acquisitions, Inc., XCL-China Coal Methane Ltd., XCL-China
LubeOil Ltd., XCL-China Ltd., and holders of the Unsecured
Notes. (N)(xvi)
10.33 Form of Indenture dated as of May 20, 1997, between the
Company, as Issuer and Fleet National Bank, as Trustee
("Indenture"). (O)(x)
10.34 Form of 13.5% Senior Secured Note due May 1, 2004,
Series A issued May 20, 1997 to Jefferies & Company, Inc. as
the Initial Purchaser (Exhibit A to the Indenture). (O)(xi)
10.35 Form of Pledge Agreement dated as of May 20, 1997,
between the Company and Fleet National Bank, as Trustee
(Exhibit C to the Indenture). (O)(xii)
10.36 Form of Cash Collateral and Disbursement Agreement
dated as of May 20, 1997, between the Company and Fleet
National Bank, as Trustee and Disbursement Agent, and Herman
J. Schellstede & Associates, Inc., as Representative
(Exhibit F to the Indenture). (O)(xiii)
10.37 Form of Intercreditor Agreement dated as of May 20,
1997, between the Company, ING (U.S.) Capital Corporation,
the holders of the Secured Subordinated Notes due April 5,
2000 and Fleet National Bank, as trustee for the holders of
the 13.5% Senior Secured Notes due May 1, 2004 (Exhibit G to
the Indenture). (O)(xiv)
10.38 Registration Rights Agreement dated as of May 20, 1997,
by and between the Company and Jefferies & Company, Inc.
with respect to the 13.5% Senior Secured Notes due May 1,
2004 and 75,000 Common Stock Purchase Warrants (Exhibit H to
the Indenture). (O)(xv)
10.39 Form of Security Agreement, Pledge and Financing
Statement and Perfection Certificate dated as of May 20,
1997, by the Company in favor of Fleet National Bank, as
Trustee (Exhibit I to the Indenture). (O)(xvi)
10.40 Registration Rights Agreement dated as of May 20, 1997,
by and between the Company and Jefferies & Company, Inc.
with respect to the 9.5% Amended Series A Preferred Stock
and Common Stock Purchase Warrants. (O)(xvii)
10.41 Form of Restated Forbearance Agreement dated effective
as of May 20, 1997, between the Company, XCL-Texas, Inc. and
ING (U.S.) Capital Corporation. (O)(xviii)
10.42 Form of Seventh Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles, The
Estate of Mary Elizabeth Mecom, The Estate of John W.
Mecom, The Mary Elizabeth Mecom Irrevocable Trust,
Matilda Gray Stream, The Opal Gray Trust, Harold H.
Stream III, The Succession of Edward M. Carmouche,
Virginia Martin Carmouche and L.M. Holding Associates,
L.P. dated May 8, 1997. (P)(i)
10.43 Form of Eighth Amendment to Credit Agreement between
Lutcher-Moore Development Corp., Lutcher & Moore Cypress
Lumber Company, The First National Bank of Lake Charles, The
Estate of Mary Elizabeth Mecom, The Estate of John W.
Mecom, The Mary Elizabeth Mecom Irrevocable Trust,
Matilda Gray Stream, The Opal Gray Trust, Harold H.
Stream III, The Succession of Edward M. Carmouche,
Virginia Martin Carmouche and L.M. Holding Associates,
L.P. dated July 29, 1997. (P)(ii)
10.44 Form of Consulting Agreement dated February 20, 1997,
between the Company and Mr. Patrick B. Collins, whereby Mr.
Collins performs certain accounting advisory services.
(Q)(ii)
10.45 Form of Consulting Agreement dated effective as of June
1, 1997, between the Company and Mr. R. Thomas Fetters, Jr.,
a director of the Company, whereby Mr. Fetters performs
certain geological consulting services. (Q)(iii)
10.46 Form of Agreement dated October 1, 1997, between the
Company and Mr. William Wang, whereby Mr. Wang performs
certain consulting services with respect to its investments
in China. (Q)(iv)
10.47 Form of Services Agreement dated August 1, 1997,
between the Company and Mr. Benjamin B. Blanchet, an officer
of the Company. (Q)(v)
10.48 Form of Promissory Note dated August 1, 1997, in a
principal amount of $100,000, made by Mr. Benjamin B.
Blanchet in favor of the Company. (Q)(vi)
11. Not applicable.
12. Not applicable.
13. Not applicable
16. Not applicable.
18. Not applicable.
19. Not applicable.
21. Subsidiaries of the Registrant
XCL-China, Ltd.
XCL-China LubeOil Ltd.
XCL-China Coal Methane Ltd.
XCL-Texas, Inc.
XCL-Acquisitions, Inc.
The Exploration Company of Louisiana, Inc.
XCL Land Ltd.
22. Not applicable.
23 Consents of Experts and Counsel:
23.1 Coopers & Lybrand *
23.2 H.J. Gruy & Associates, Inc. *
24. Not applicable.
27. Financial Data Schedule *
99.1 Reserve Report dated January 1, 1998 prepared by H.J. Gruy &
Associates, Inc. *
99.2 Glossary of Terms *
- ------------
* Filed herewith.
(A) Incorporated by reference to the Registration Statement on
Form 8-B filed on July 28, 1988, where it appears as
Exhibits 3(c).
(B) Incorporated by reference to a Registration Statement on
Form S-3 (File No. 33-68552) where it appears as Exhibit
10.1.
(C) Incorporated by reference to Post-Effective Amendment No. 2
to Registration Statement on Form S-3 (File No. 33-68552)
where it appears as: (i) Exhibit 4.29; (ii) Exhibit 4.30;
and (iii) through (v) Exhibits 4.34 through 4.36,
respectively.
(D) Incorporated by reference to Amendment No. 1 to Annual
Report on Form 10-K filed April 15, 1994, where it appears
as: (i) Exhibit 4.32; (ii) Exhibit 4.36; (iii) Exhibit
4.37; (iv) through (v) Exhibit 10.41 through Exhibit 10.47,
respectively; and (v) Exhibit 10.49.
(E) Incorporated by reference to an Annual Report on Form 10K
for the fiscal year ended December 31, 1990, filed April 1,
1991, where it appears as Exhibit 10.27.
(F) Incorporated by reference to Amendment No. 1 to an Annual
Report on Form 10-K/A No. 1 for the fiscal year ended
December 31, 1994, filed April 17, 1995, where it appears
as: (i) through (ii) Exhibits 10.22 through 10.23,
respectively.
(G) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995, filed May 15,
1995, where it appears as: (i) Exhibit 10.26; and (ii)
Exhibit 10.28.
(H) Incorporated by reference to Quarterly Report on Form 10-
Q for the quarter ended June 30, 1995, filed August 14,
1995, where it appears as: (i) through (v) Exhibits 10.29
through 10.33, respectively.
(I) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, filed November
13, 1995, where it appears as Exhibit 10.35.
(J) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1995, filed April 15, 1996,
where it appears as: (i) through (iii) Exhibits 4.28
through 4.30, respectively; and (iv) Exhibit 10.31 and
(v) through (vii) Exhibits 10.33 through 10.36,
respectively.
(K) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, filed May 15, 1996,
where it appears as Exhibit 10.37.
(L) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, filed August 14, 1996,
where it appears as Exhibit 10.38.
(M) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed November 14,
1996, where it appears as (i) through (iii) Exhibits 4.32
through 4.34.
(N) Incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996, filed April 15, 1997,
where it appears as (i) through (iii) Exhibits 4.35 through
4.38; (iv) Exhibit 4.40; and (v) through (xvi) Exhibits
10.39 through 10.50.
(O) Incorporated by reference to Current Report on Form 8-K
dated May 20, 1997, filed June 3, 1997, where it appears as
(i) through (ix) Exhibits 4.1 through 4.9 and (x) through
(xviii) Exhibits 10.51 through 10.59.
(P) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, filed August 14, 1997,
where it appears as (i) and (ii) Exhibits 10.60 and 10.61.
(Q) Incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed November 14,
1997, where it appears as (i) Exhibit 4.52; and (ii) through
(vi) Exhibits 10.61 through 10.66.
OTHER MATTERS
For purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities
Act of 1933, the undersigned registrant hereby undertakes as
follows, which undertaking shall be incorporated by reference
into registrant's Registration Statement on Form S-8 No. 33-21891
(filed May 13, 1988):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the 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 of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the 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 Act and will be governed by the final
adjudication of such issue.
<PAGE>
<TABLE>
XCL Ltd. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(thousands of dollars)
<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>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XCL LTD.
/s/ Marsden W. Miller, Jr.
April 14, 1998 By:_________________________________
Marsden W. Miller, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Marsden W. Miller, Jr.
______________________ Chairman of the Board April 14, 1998
Marsden W. Miller, Jr. Chief Executive Officer
/s/ Steven B. Toon
______________________ Principal Accounting Officer April 14, 1998
Steven B. Toon and Principal Financial Officer
/s/ John T. Chandler
______________________ Director April 14, 1998
John T. Chandler
/s/ Benjamin B. Blanchet
______________________ Director April 14, 1998
Benjamin B. Blanchet
/s/ R. Thomas Fetters, Jr.
______________________ Director April 14, 1998
R. Thomas Fetters, Jr.
______________________ Director April 14, 1998
Fred Hofheinz
/s/ Arthur W. Hummel, Jr.
______________________ Director April 14, 1998
Arthur W. Hummel, Jr.
/s/ Michael Palliser
_____________________ Director April 14, 1998
Michael Palliser
/s/ Francis J. Reinhardt, Jr.
______________________ Director April 14, 1998
Francis J. Reinhardt, Jr.
FACE OF COMMON STOCK CERTIFICATE OF XCL LTD.
[RED BORDER]
NUMBER [XCL LOGO] SHARES
A
XCL LTD.
Incorporated under the Laws of the State of Delaware
CUSIP 983701 10 3
COMMON SHARES See Reverse for Certain Definitions
This Certificate is Transferable in New York or Ilford, Essex
THIS IS TO CERTIFY THAT
IS THE REGISTERED HOLDER OF
Fully-Paid and Non-Assessable Common Shaers with $.01 Par Value
of
XCL Ltd.
(hereinafter called the "Corporation") transferable only on the
books of the Corporation by the holder hereof in person or by
duly authorized attorney, upon surrender of this certificate
properly endorsed. This certificate and the shares represented
hereby are issued and shall beheld subject to all the provisions
of the Articles of Incorporation of the Corporation, as now or
hereafter amended, to all of which the holder by acceptance
hereof assents.
This Certificate is not valid unless countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS, the facsimile signatures of the duly authorized
officers of the Corporation.
Dated:
/s/ Lisha C. Falk /s/ John T. Chandler
Secretary President
Countersigned and Registered:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Transfer Agent and Registrar
By:
Authorized Signature
[REVERSE OF CERTIFICATE]
XCL Ltd.
This corporation will furnish to any shareholder upon
request and without charge, a summary of the designations,
relative rights, preferences and limitation of the shares of each
class and of each series of preferred or special class, so far as
the same have been fixed, and the authority of the Board to
establish other series and to fix the relative rights, preferencs
and limitations of the shares of any class or series by amendment
of the articles.
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
______ Custodian
TEN ENT - as tenants by the entireties Under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act ___________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
ASSIGNMENT
For Value Received, ______________________________ hereby sell,
assign and transfer unto
(Please insert Social Security or other Identifying Number of
Assignee) ________________________________________________________
_________________________________________________________________
(Please print or typewrite name and address, including postal zip
code, of assignee)_______________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
of the capital stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint
_______________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated_________________________
X____________________________
(Signature)
NOTICE: The signature(s) to this assignment must correspond
with the name(s) as written X_____________________________
upon the face of the Certificate without (Signature)
alteration or any change whatever.
The signature(s) should be guaranteed by an
eligible guarantor institution (banks,
stockbrokers, savings and loan associations
and credit unions with membership in an
approved signature guarantee program),
pursuant to S.E.C. Rule 17Ad-15.
Signature(s) Guaranteed By:
FACE OF COMMON STOCK CERTIFICATE OF XCL LTD.
[RED BORDER]
NUMBER [XCL LOGO] SHARES
B
XCL LTD.
Incorporated under the Laws of the State of Delaware
CUSIP 983701 10 3
COMMON SHARES See Reverse for Certain Definitions
This Certificate is Transferable in New York or Ilford, Essex
THIS IS TO CERTIFY THAT
IS THE REGISTERED HOLDER OF
Fully-Paid and Non-Assessable Common Shaers with $.01 Par Value
of
XCL Ltd.
(hereinafter called the "Corporation") transferable only on the
books of the Corporation by the holder hereof in person or by
duly authorized attorney, upon surrender of this certificate
properly endorsed. This certificate and the shares represented
hereby are issued and shall beheld subject to all the provisions
of the Articles of Incorporation of the Corporation, as now or
hereafter amended, to all of which the holder by acceptance
hereof assents.
This Certificate is not valid unless countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS, the facsimile signatures of the duly authorized
officers of the Corporation.
Dated:
/s/ Lisha C. Falk /s/ John T. Chandler
Secretary President
Countersigned and Registered:
IRG plc
U.K. Transfer Agent
By:
Authorized Signature
[REVERSE OF CERTIFICATE]
XCL Ltd.
This corporation will furnish to any shareholder upon
request and without charge, a summary of the designations,
relative rights, preferences and limitation of the shares of each
class and of each series of preferred or special class, so far as
the same have been fixed, and the authority of the Board to
establish other series and to fix the relative rights, preferencs
and limitations of the shares of any class or series by amendment
of the articles.
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -______ Custodian
TEN ENT - as tenants by the entireties Under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act ___________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
ASSIGNMENT
For Value Received, ______________________________ hereby sell,
assign and transfer unto (Please insert Social Security or other Identifying
Number of Assignee) __________________
___________________________________________________________________________
(Please print or typewrite name and address, including postal zip
code, of assignee)
_________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
of the capital stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint
_______________________________________________________________Attorney
to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated_________________________
X____________________________
(Signature)
NOTICE: The signature(s) to this assignment
must correspond with the name(s) as written X_____________________________
upon the face of the Certificate without (Signature)
alteration or any change whatever.
The signature(s) should be guaranteed by an
eligible guarantor institution (banks,
stockbrokers, savings and loan associations
and credit unions with membership in an
approved signature guarantee program),
pursuant to S.E.C. Rule 17Ad-15.
Signature(s) Guaranteed By:
State of Delaware
Office of the Secretary of State
_________________________________________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE RESTATED CERTIFICATE OF "XCL LTD.", FILED IN THIS
OFFICE ON THE SIXTH DAY OF JANUARY, A.D. 1998, AT 1 O'CLOCK P.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
/s/ Edward J. Freel
[SEAL OF SECRETARY OF STATE] ____________________________
Edward J. Freel, Secretary of State
2147839 8100 AUTHENTICATION: 8850640
981004988 DATE: 01/06/98
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
XCL LTD.
(Pursuant to Section 242 of the General Corporation Law)
THE UNDERSIGNED, Benjamin B. Blanchet and Lisha C. Falk,
being the duly elected Executive Vice President and Secretary,
respectively of XCL Ltd., a Delaware corporation (the
"Corporation"), for the purposes of amending Article FOURTH,
paragraph D of the Amended and Restated Certificate of
Incorporation pursuant to Section 242 of the General Corporation
Law of the State of Delaware, DO HEREBY CERTIFY THAT:
FIRST: On October 27, 1997, the Board of Directors of said
Corporation has duly adopted a resolution proposing the following
amendment to the terms of the Corporation's Series F, Cumulative
Convertible Preferred Stock ("Series F Preferred Stock"),
originally filed February 21, 1997, with the Secretary of State
of the State of Delaware pursuant to Section 151 of the General
Corporation Law of the State of Delaware, and declaring such
amendment's advisability. The proposed amendment as set forth in
said resolutions is as follows:
RESOLVED: That is in the best interests of the
Corporation and its shareholders that the
definition of "Forced Conversion Date" as set
forth in Paragraph 2(a) of the terms of the
Corporation's Series F, Cumulative Convertible
Preferred Stock, par value $1.00 per share
("Series F Preferred Stock") be amended, and the
same hereby is amended, subject to the receipt of
the requisite approval of the holders of the
Series F Preferred Stock ("Series F Holders"), to
read in its entirety as follows:
"`Forced Conversion Date' means that date on which the
Corporation obtains a sufficient number of shares
of its Common Stock, whether by increase of the
authorized but unissued shares of Common Stock or
by combination of the outstanding shares of
Common Stock into a lesser number of shares or
otherwise, to permit the reservation of shares of
Common Stock for issuance upon exercise of the
outstanding Common Stock purchase warrants issued
to the holders of Series F Preferred Stock to
purchase an aggregate 2,300,000 shares of Common
Stock, at an exercise price of $.01 per share."
RESOLVED: That the remaining terms and provisions of the
Series F Preferred Stock remain in full force and
effect without amendment; and it was further
RESOLVED: That in consideration for, and to induce the
Series F Holders to approve the aforementioned
amendment to the terms of the Series F Preferred
Stock, the Corporation, be, and it hereby is
authorized and directed to issue, on a pro rata
basis, to the Series F Holders, warrants to
purchase an aggregate 2,300,000 shares of Common
Stock at an exercise price of $.01 per share under
the terms and conditions set forth in the form of
warrant agreement presented to this meeting, the
form of which is hereby approved and adopted;
RESOLVED: That the proper officers of the Corporation
be, and they hereby are authorized and directed to
solicit the written consent of the holders of
record on October 27, 1997, the record date for
such solicitation, of the Series F Preferred Stock
to the aforementioned amendment to definition of
"Forced Conversion Date" as set forth in Paragraph
2(a) of the terms of the Series F Preferred Stock
and to prepare, execute, deliver, file, record and
affix the corporate seal to all such certificates,
instruments and other documents and take all such
other actions as they deem necessary or
appropriate, in the name and on behalf of the
Corporation, to effect such amendment and to
implement these resolutions."
SECOND: In lieu of a meeting and vote the holders of the
Series F Preferred Stock, the holders of record on the record
date, October 27, 1997, of the Series F Preferred Stock have
given their written consent to said amendment in accordance with
the provisions of Section 228 of the General Corporation Law of
the State of Delaware, which written consents have been filed
with the Corporation.
THIRD: The capital of the Corporation shall not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, the said Corporation has caused this
Certificate of Amendment to be signed and attested by its
officers thereunto duly authorized and its corporate seal to be
affixed this 6th day of January, 1998.
/s/ Benjamin B. Blanchet
_____________________________
Benjamin B. Blanchet
Executive Vice President
ATTEST:
/s/ Lisha C. Falk
_______________________________
Lisha C. Falk
Secretary
STATE OF LOUISIANA )
:ss:
PARISH OF LAFAYETTE )
BE IT REMEMBERED that on this 6th day of January, 1998,
personally came before me, a Notary Public in and for the State
and Parish aforesaid, Benjamin B. Blanchet and Lisha C. Falk, the
Executive Vice President and the Secretary, respectively, of XCL
Ltd., the corporation described in the foregoing instrument and
known to me personally to be such, and acknowledged the said
instrument to be their own act and deed and the act and deed of
said corporation; that the signatures are in their own
handwriting , and that the facts stated in said instrument are
true.
/s/ Paula Guidry
________________________________
Notary Public
My commission expires: At Death
XCL LTD.
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY OTHER FEDERAL OR STATE SECURITIES OR
BLUE SKY LAWS OF ANY OTHER DOMESTIC OR FOREIGN JURISDICTION. NO
OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION (COLLECTIVELY,
A "DISPOSAL") OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY
BE MADE UNLESS (i) REGISTERED UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES OR BLUE SKY LAWS OR (ii) XCL LTD. (THE "CO
MPANY") RECEIVES A WRITTEN OPINION OF UNITED STATES LEGAL COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO IT TO THE EFFECT THAT SUCH
DISPOSAL IS EXEMPT FROM SUCH REGISTRATION REQUIREMENTS.
No.
WARRANTS TO PURCHASE
COMMON STOCK OF XCL LTD.
Initial Issuance on January 16, 1998
Void after 5:00 p.m. Louisiana Time, December 31, 2001
THIS CERTIFIES THAT, for value
received,_____________________________, or registered assigns
(the "Holder") is the registered holder of warrants (the "War
rants") to purchase from XCL Ltd., a Delaware corporation (the
"Company"), at any time or from time to time beginning on January
16, 1998 and until 5:00 p.m., local time, on December 31, 2001
(the "Expiration Date"), subject to the conditions set forth
herein, at the initial exercise price of $0.15 per share (the
"Initial Exercise Price"), subject to adjustment as set forth
herein (the "Exercise Price"), up to an aggregate of
_____________________(_______) fully paid and non-assessable
common shares, par value $0.15 per share (the "Common Stock"), of
the Company (the "Shares") upon surrender of this amended and
restated warrant certificate (the "Certificate") and payment of
the Exercise Price multiplied by the number of Shares in respect
of which Warrants are then being exercised (the "Purchase Price")
at the principal office of the Company presently located at 110
Rue Jean Lafitte, Lafayette, LA 70508, United States of America.
1.
Exercise of Warrants.
(a) The exercise of any Warrants represented by this
Certificate is subject to the conditions set forth below in
paragraph 4, "Compliance with U.S. Securities Laws."
(b) Subject to compliance with all of the conditions set
forth herein, the Holder shall have the right at any time and
from time to time after January 16, 1998 to purchase from the
Company the number of Shares which the Holder may at the time be
entitled to purchase pursuant hereto, upon surrender of this
Certificate to the Company at its principal office, together with
the form of election to purchase attached hereto duly completed
and signed, and upon payment to the Company of the Purchase
Price.
No Warrant may be exercised after 5:00 p.m.,
local time, on the Expiration Date, after which time all Warrants
evidenced hereby shall be void.
(c) Payment of the Purchase Price shall be made in cash, by
wire transfer of immediately available funds or by certified
check or banker's draft payable to the order of the Company, or
any combination of the foregoing.
(d) The Warrants represented by this Certificate are
exercisable at the option of the Holder, in whole or in part (but
not as to fractional Shares). Upon the exercise of less than all
of the Warrants evidenced by this Certificate, the Company shall
forthwith issue to the Holder a new certificate of like tenor
representing the number of unexercised Warrants.
(e) Subject to compliance with all of the conditions set
forth herein, upon surrender of this Certificate to the Company
at its principal office, together with the form of election to
purchase attached hereto duly completed and signed, and upon
payment of the Purchase Price, the Company shall cause to be
delivered promptly to or upon the written order of the Holder and
in such name or names as the Holder may designate, a share
certificate or share certificates for the number of whole Shares
purchased upon the exercise of the Warrants. Such share
certificate or share certificates representing the Shares shall
be free of any restrictive legend. The Company shall ensure that
no "stop transfer" or similar instruction or order with respect
to the Shares purchased upon exercise of the Warrants shall be in
effect at ChaseMellon Shareholders Services LLC, IRG plc or any
successor transfer agent for the Common Stock of the Company (the
"Transfer Agent").
2. Elimination of Fractional Interests. The Company shall
not be required to issue certificates representing fractions of
Shares and shall not be required to issue scrip in lieu of
fractional interests. Instead of any fractional Shares that
would otherwise be issuable to the Holder, the Company shall pay
to the Holder a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest of the
then-current Market Price per share (as defined in Section 7(f)
hereof).
3. Payment of Taxes. The Company will pay all documentary
stamp taxes, if any, attributable to the issuance and delivery of
the Shares upon the exercise of the Warrants; provided, however,
that the Company shall not be required to pay any taxes which may
be payable in respect of any transfer involved in the issuance or
delivery of any Warrant or any Shares in any name other than that
of the Holder, which transfer taxes shall be paid by the Holder,
and until payment of such transfer taxes, if any, the Company
shall not be required to issue such Shares.
4. Compliance with U.S. Securities Laws. The Warrants
have not been, and will not be, registered under the United
States Securities Act of 1933, as amended (the "Securities Act"),
or any other federal or state securities or blue sky laws. No
offer, sale, transfer, pledge or other disposition (collectively,
a "Disposal") of the Warrants represented by this Certificate may
be made unless (i) registered under the Act and any applicable
State securities or blue sky laws or (ii) the Company receives a
written opinion of United States legal counsel in form and
substance satisfactory to it to the effect that such Disposal is
exempt from such registration requirements..
5. Transfer of Warrants.
(a) The Warrants shall be transferable only on the
books of the Company maintained at the Company's principal office
upon delivery of this Certificate with the form of assignment
attached hereto duly completed and signed by the Holder or by its
duly authorized attorney or representative, accompanied by proper
evidence of succession, assignment or authority to transfer. The
Company may, in its discretion, require, as a condition to any
transfer of Warrants, a signature guarantee, which may be
provided by a commercial bank or trust company, by a broker or
dealer which is a member of the National Association of
Securities Dealers, Inc., or by a member of a United States
national securities exchange, The Securities and Futures
Authority Limited in the United Kingdom, or The London Stock
Exchange Limited in London, England. Upon any registration of
transfer, the Company shall deliver a new warrant certificate or
warrant certificates of like tenor and evidencing in the
aggregate a like number of Warrants to the person entitled
thereto in exchange for this Certificate, subject to the
limitations provided herein, without any charge except for any
tax or other governmental charge imposed in connection therewith.
(b) Notwithstanding anything in this Certificate to
the contrary, neither any of the Warrants nor any of the Shares
issuable upon exercise of any of the Warrants shall be
transferable, except upon compliance by the Holder with any
applicable provisions of the Securities Act and any applicable
state securities or blue sky laws.
6. Exchange and Replacement of Warrant
Certificates; Loss or Mutilation of
Warrant Certificates.
(a) This Certificate is exchangeable without cost, upon the
surrender hereof by the Holder at the principal office of the
Company, for new warrant certificates of like tenor and date
representing in the aggregate the right to purchase the same
number of Shares in such denominations as shall be designated by
the Holder at the time of such surrender. Any transfer not made
in such compliance shall be null and void and shall be given no
effect hereunder.
(b) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation
of this Certificate and, in case of such loss, theft or
destruction, of indemnity and security reasonably satisfactory to
it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this
Certificate, if mutilated, the Company will make and deliver a
new warrant certificate of like tenor, in lieu thereof.
7. Initial Exercise Price; Adjustment of Exercise Price and
Number of Shares.
(a) The Warrants initially are exercisable at the Initial
Exercise Price per Share, subject to adjustment from time to time
as provided herein. No adjustments will be made for cash
dividends, if any, paid to shareholders of record prior to the
date on which the Warrants are exercised.
(b) In case the Company shall at any time after the
date of this Certificate (i) declare a dividend on the shares of
Common Stock payable in shares of Common Stock, or (ii) subdivide
or split up the outstanding shares of Common Stock, the amount of
Shares to be delivered upon exercise of any Warrant will be
appropriately increased so that the Holder will be entitled to
receive the amount of Shares that such Holder would have owned
immediately following such actions had such Warrant been
exercised immediately prior thereto, and the Exercise Price in
effect immediately prior to the record date for such dividend or
the effective date for such subdivision shall be proportionately
decreased, all effective immediately after the record date for
such dividend or the effective date for such subdivision or split
up. Such adjustments shall be made successively whenever any
event listed above shall occur.
(c) In case the Company shall at any time after the
date of this Certificate combine the outstanding shares of Common
Stock into a smaller number of shares the amount of Shares to be
delivered upon exercise of any Warrant will be appropriately
decreased so that the Holder will be entitled to receive the
amount of Shares that such Holder would have owned immediately
following such action had such Warrant been exercised immediately
prior thereto, and the Exercise Price in effect immediately prior
to the record date for such combination shall be proportionately
increased, effective immediately after the record date for such
combination. Such adjustment shall be made successively whenever
any such combinations shall occur.
(d) In the event that the Company shall at any time
after the date of this Certificate (i) issue or sell any shares
of Common Stock (other than the Shares) or securities convertible
or exchangeable into Common Stock to all holders of Common Stock
without consideration or at a price per share (or having a
conversion price per share, if a security convertible into Common
Stock) less than the Market Value per share of Common Stock (as
defined in Section 7(f) hereof), or (ii) issue or sell options,
rights or warrants to subscribe for or purchase Common Stock to
all holders of Common Stock at a price per share less than the
Market Price per share of Common Stock (as defined in Section
7(f) hereof), the Exercise Price to be in effect after the date
of such issuance shall be determined by multiplying the Exercise
Price in effect on the day immediately preceding the relevant
issuance or record date, as the case may be, used in determining
such Market Value or Market Price, by a fraction, the numerator
of which shall be the number of shares of Common Stock
outstanding on such issuance or record date plus the number of
shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so to be issued or to be
offered for subscription or purchase (or the aggregate initial
conversion price of the convertible securities so to be offered)
would purchase at such Market Value or Market Price, as the case
may be, and the denominator of which shall be the number of
shares of Common Stock outstanding on such issuance or record
date plus the number of additional shares of Common Stock to be
issued or to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially
convertible); such adjustment shall become effective immediately
after the close of business on such issuance or record date;
provided, however, that no such adjustment shall be made for the
issuance of (s) options to purchase shares of Common Stock
granted pursuant to the Company's employee stock option plans
approved by shareholders of the Company (and the shares of Common
Stock issuable upon exercise of such options) (provided that
option exercise prices shall not be less than the Market Value of
the Common Stock (as defined in Section 7(f) hereof) on the date
of the grant of such options), (t) the Company's warrants to
purchase shares of Common Stock (and the shares of Common Stock
issuable upon exercise of such warrants), outstanding on the date
hereof, (u) the Company's shares of Amended Series A, Cumulative
Convertible Preferred Stock (and the shares of Common Stock
issuable upon conversion of such Preferred Stock), outstanding on
the date hereof, or (v) the Company's shares of Series B,
Cumulative Preferred Stock (and the shares of Common Stock
issuable in lieu of dividend and redemption payments thereunder),
outstanding on the date hereof. In case such subscription price
may be paid in a consideration, part or all of which shall be in
a form other than cash, the value of such consideration shall be
as determined reasonably and in good faith by the Board of
Directors of the Company. Shares of Common Stock owned by or
held for the account of the Company or any wholly-owned
subsidiary shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively
whenever the date of such issuance is fixed (which date of
issuance shall be the record date for such issuance if a record
date therefor is fixed); and, in the event that such shares or
options, rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then
be in effect if the date of such issuance had not been fixed.
(e) In case the Company shall make a distribution
to all holders of Common Stock (including any such distribution
made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of its
indebtedness, securities other than Common Stock or assets (other
than cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in
Common Stock), the Exercise Price to be in effect after such date
of distribution shall be determined by multiplying the Exercise
Price in effect on the date immediately preceding the record date
for the determination of the shareholders entitled to receive
such distribution by a fraction, the numerator of which shall be
the Market Price per share of Common Stock (as defined in Section
7(f) hereof) on such date, less the then-fair market value (as
determined reasonably and in good faith by the Board of Directors
of the Company of the portion of the assets, securities or
evidences of indebtedness so to be distributed applicable to one
share of Common Stock and the denominator of which shall be such
Market Price per share of Common Stock, such adjustment to be
effective immediately after the distribution resulting in such
adjustment. Such adjustment shall be made successively whenever
a date for such distribution is fixed (which date of distribution
shall be the record date for such distribution if a record date
therefor is fixed); and, if such distribution is not so made, the
Exercise Price shall again be adjusted to be the Exercise Price
which would then be in effect if such date of distribution had
not been fixed.
(f) For the purposes of any computation under this
Section 7, the "Market Price per share" of Common Stock on any
date shall be deemed to be the average of the closing bid price
for the 20 consecutive trading days ending on the record date for
the determination of the shareholders entitled to receive any
rights, dividends or distributions described in this Section 7,
and the "Market Value per share" of Common Stock on any date
shall be deemed to be the closing bid price on the date of the
issuance of the securities for which such computation is being
made, as reported on the principal United States securities
exchange on which the Common Stock is listed or admitted to
trading or if the Common Stock is not then listed on any United
States stock exchange, the average of the closing sales price on
each such day during such 20 day period, in the case of the
Market Price computation, or on such date of issuance, in the
case of the Market Value computation, in the over-the-counter
market as reported by the National Association of Securities
Dealers' Automated Quotation System ("NASDAQ"), or, if not so
reported, the average of the closing bid and asked prices on each
such day during such 20 day period in the case of the Market
Price computation, or on such date of issuance, in the case of
the Market Value computation, as reported in the "pink sheets"
published by the National Quotation Bureau, Inc. or any successor
thereof, or, if not so quoted, the average of the middle market
quotations for such 20 day period in the case of the Market Price
computation, or on such date of issuance, in the case of the
Market Value computation, as reported on the daily official list
of the prices of stock listed on The London Stock Exchange
Limited ("The Stock Exchange Daily Official List"). "Trading
day" means any day on which the Common Stock is available for
trading on the applicable securities exchange or in the
applicable securities market. In the case of Market Price or
Market Value computations based on The Stock Exchange Daily
Official List, the Market Price or Market Value shall be
converted into United States dollars at the then spot market
exchange rate of pounds sterling (UK) into United States dollars
as quoted by Chemical Bank or any successor bank thereto on the
date of determination. If a quotation of such exchange rate is
not so available, the exchange rate shall be the exchange rate of
pounds sterling in United States dollars as quoted in The Wall
Street Journal on the date of determination.
(g) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least 1% in such price; provided that any
adjustments which by reason of this Section 7(g) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment; provided, further that such adjustment
shall be made in all events (regardless of whether or not the
amount thereof or the cumulative amount thereof amounts to 1% (or
more) upon the happening of one or more of the events specified
in Sections 7(b), (c) or (i). All calculations under this
Section 7 shall be made to the nearest cent.
(h) If at any time, as a result of an adjustment
made pursuant to Section 7(b) or (c) hereof, the Holder of any
Warrant thereafter exercised shall become entitled to receive any
shares of the Company other than shares of Common Stock,
thereafter the number of such other shares so receivable upon
exercise of any Warrant shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Shares
contained in this Section 7, and the provisions of this
Certificate with respect to the Shares shall apply on like terms
to such other shares.
(i) In the case of (l) any capital reorganization
of the Company, or of (2) any reclassification of the shares of
Common Stock (other than a subdivision or combination of
outstanding shares of Common Stock), or (3) any consolidation or
merger of the Company, or (4) the sale, lease or other transfer
of all or substantially all of the properties and assets of the
Company as, or substantially as, an entirety to any other person
or entity, each Warrant shall after such capital reorganization,
reclassification of the shares of Common Stock, consolidation, or
sale be exercisable, upon the terms and conditions specified in
this Certificate, for the number of shares of stock or other
securities or assets to which a holder of the number of Shares
purchasable (immediately prior to the effectiveness of such
capital reorganization, reclassification of shares of Common
Stock, consolidation, or sale) upon exercise of a Warrant would
have been entitled upon such capital reorganization,
reclassification of shares of Common Stock, consolidation, merger
or sale; and in any such case, if necessary, the provisions set
forth in this Section 7 with respect to the rights thereafter of
the Holder shall be appropriately adjusted (as determined
reasonably and in good faith by the Board of Directors of the
Company) so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or assets thereafter
deliverable on the exercise of a Warrant. The Company shall not
effect any such consolidation or sale, unless prior to or
simultaneously with the consummation thereof, the successor
corporation, partnership or other entity (if other than the
Company) resulting from such consolidation or the corporation,
partnership or other entity purchasing such assets or the
appropriate entity shall assume, by written instrument, the
obligation to deliver to the Holder of each Warrant the shares of
stock, securities or assets to which, in accordance with the
foregoing provisions, such Holder may be entitled and all other
obligations of the Company under this Certificate. For purposes
of this Section 7(i) a merger to which the Company is a party but
in which the Common Stock outstanding immediately prior thereto
is changed into securities of another corporation shall be deemed
a consolidation with such other corporation being the successor
and resulting corporation.
(j) Irrespective of any adjustments in the Exercise
Price or the number or kind of shares purchasable upon the
exercise of the Warrant, Warrant Certificates theretofore or
thereafter issued may continue to express the same Exercise Price
per share and number and kind of Shares as are stated on the
Warrant Certificates initially issuable pursuant to this Warrant.
8. Notices to Warrant Holders. Nothing contained in this
Certificate shall be construed as conferring upon the Holder the
right to vote or to consent or to receive notice as a stockholder
in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever
as a stockholder of the Company. If, however, at any time prior
to the exercise or expiration of the Warrants, any of the
following events shall occur:
(i) the holders of shares of the Common Stock shall
be entitled to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend
or distribution payable otherwise than out of
current or retained earnings, as indicated by the
accounting treatment of such dividend or dis
tribution on the books of the Company; or
(ii) the Company shall offer to all the holders
of its Common Stock any additional shares of
capital stock of the Company or securities
convertible into or exchangeable for shares of
capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(iii) a dissolution, liquidation or winding-up of
the Company (other than in connection with a
consolidation or merger) or a sale of all or sub
stantially all of its property, assets and business
as an entirety shall be approved by the Company's
Board of Directors; or
(iv) there shall be any capital reorganization
or reclassification of the capital stock of the
Company (other than a change in the number of
outstanding shares of Common Stock or a change in
the par value of the Common Stock), or
consolidation or merger of the Company with another
entity;
then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to
the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled
to such dividend, distribution, convertible or exchangeable secur
ities or subscription rights, options or warrants, or entitled to
vote on such proposed dissolution, liquidation, winding-up or
sale. Such notice shall specify such record date or the date of
closing the transfer books, as the case may be. Failure to give
such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment
of any such dividend or distribution, or the issuance of any
convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation,
winding-up or sale.
9. Reservation and Listing of Securities.
The Company covenants and agrees that concurrent with the
conversion of the Series F, Cumulative Convertible Preferred
Stock into Common Stock, and at all times during the period
afterward, the Company shall reserve and keep available, free
from preemptive rights, out of its authorized and unissued shares
of Common Stock or out of its authorized and issued shares of
Common Stock held in its treasury, solely for the purpose of
issuance upon exercise of the Warrants, such number of Shares as
shall be issuable upon the exercise of the Warrants.
(b) The Company covenants and agrees that, upon
exercise of the Warrants in accordance with their terms and
payment of the Purchase Price, all Shares issued or sold upon
such exercise shall not be subject to the preemptive rights of
any stockholder and when issued and delivered in accordance with
the terms of the Warrants shall be duly and validly issued, fully
paid and non-assessable, and the Holder shall receive good and
valid title to such Shares free and clear from any adverse claim
(as defined in the applicable Uniform Commercial Code), except
such as have been created by the Holder.
(c) As long as the Warrants shall be outstanding,
the Company shall use its reasonable efforts to cause all Shares
issuable upon the exercise of the Warrants to be quoted by or
listed on any national securities exchange or other securities
listing service on which the shares of Common Stock of the
Company are then listed.
10. Survival. All agreements, covenants, representations
and warranties herein shall survive the execution and delivery of
this Certificate and any investigation at any time made by or on
behalf of any party hereto and the exercise, sale and purchase of
the Warrants and the Shares (and any other securities or
properties) issuable on exercise hereof.
11. Remedies. The Company agrees that the remedies at law
of the Holder, in the event of any default or threatened default
by the Company in the performance of or compliance with any of
the terms hereof, may not be adequate and such terms may, in
addition to and not in lieu of any other remedy, be specifically
enforced by a decree of specific performance of any agreement
contained herein or by an injunction against a violation of any
of the terms hereof or otherwise.
12. Registered Holder. The Company may deem and treat the
registered Holder hereof as the absolute owner of this
Certificate and the Warrants represented hereby (notwithstanding
any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise of the Warrants, of any
notice, and of any distribution to the Holder hereof, and for all
other purposes, and the Company shall not be affected by any
notice to the contrary.
13. Notices. All notices and other communications from the
Company to the Holder of the Warrants represented by this Certifi
cate shall be in writing and shall be deemed to have been duly
given if and when personally delivered, two (2) business days
after sent by overnight courier or ten (10) days after mailed by
certified, registered or international recorded mail, postage
prepaid and return receipt requested, or when transmitted by
telefax, telex or telegraph and confirmed by sending a similar
mailed writing, if to the Holder, to the last address of such
Holder as it shall appear on the books of the Company maintained
at the Company's principal office or to such other address as the
Holder may have specified to the Company in writing.
14. Headings. The headings contained herein are for
convenience of reference only and are not part of this
Certificate.
Governing Law. This Certificate shall be deemed to be a
contract made under the laws of the State of Delaware and for all
purposes shall be governed by, and construed in accordance with,
the laws of said state, without regard to the conflict of laws
provisions thereof.
IN WITNESS WHEREOF, the Company has caused this Amended and
Restated Warrant Certificate to be duly executed by its duly
authorized officers under its corporate seal.
Dated:
XCL LTD.
By:
Benjamin B. Blanchet
Executive Vice President
Attest:
Secretary
XCL LTD.
FORM OF ELECTION TO PURCHASE
(To be executed by the registered Holder
if such Holder desires to exercise Warrants)
The undersigned registered Holder hereby irrevocably elects
to exercise the right of purchase represented by this Warrant
Certificate for, and to purchase, Shares hereunder,
and herewith tenders in payment for such Shares cash, a wire
transfer, a certified check or a banker's draft payable to the
order of XCL Ltd. in the amount of , all
in accordance with the terms hereof. The undersigned requests
that a share certificate for such Shares be registered in the
name of and delivered to:
(Please Print Name and Address)
and, if said number of Shares shall not be all the Shares purchas
able hereunder, that a new Warrant Certificate for the balance
remaining of the Shares purchasable hereunder be registered in
the name of the undersigned Warrant Holder or his Assignee as
below indicated and delivered to the address stated below.
DATED:
Name of Warrant Holder:
(Please Print)
Address:
Signature:
Note: The above signature must correspond in all respects
with the name of the Holder as specified on the
face of this Warrant Certificate, without
alteration or enlargement or any change whatsoever,
unless the Warrants represented by this Warrant
Certificate have been assigned.
XCL LTD.
FORM OF ASSIGNMENT
(To be executed by the registered Holder if such Holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells,
assigns and transfers to:
(Please Print Name and Address of Transferee)
Warrants to purchase up to Shares represented by this
Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
, Attorney, to transfer such Warrants on the books of the
Company, with full power of substitution in the premises. The
undersigned requests that if said number of Shares shall not be
all of the Shares purchasable under this Warrant Certificate that
a new Warrant Certificate for the balance remaining of the Shares
purchasable under this Warrant Certificate be registered in the
name of the undersigned Warrant Holder and delivered to the regis
tered address of said Warrant Holder.
DATED:
Signature of registered Holder:
Note: The above signature must correspond in all respects
with the name of the Holder as specified on the
face of this Warrant Certificate, without
alteration or enlargement or any change whatsoever.
The above signature of the registered Holder must
be guaranteed by a commercial bank or trust
company, by a broker or dealer which is a member of
the National Association of Securities Dealers,
Inc. or by a member of a national securities
exchange, The Securities and Futures Authority
Limited in the United Kingdom or The London Stock
Exchange Limited in London, England. Notarized or
witnessed signatures are not acceptable as
guaranteed signatures.
Signature Guaranteed:
Authorized Officer
Name of Institution
State of Delaware
Office of the Secretary of State
______________________________________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF CERTIFICATE OF DESIGNATION OF "XCL LTD.", FILED IN THIS
OFFICE ON THE FOURTH DAY OF MARCH, A.D. 1998, AT 4:30 O'CLOCK
P.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
[SEAL OF SECRETARY OF STATE] /s/ Edward J. Freel
____________________________
Edward J. Freel, Secretary of State
2147839 8100 AUTHENTICATION: 8955712
981085154 DATE: 03/05/98
CERTIFICATE OF DESIGNATION
OF
AMENDED SERIES B, CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
XCL LTD.
_____________________________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
XCL Ltd., a corporation organized and existing under
the laws of the State of Delaware (the "Company"), HEREBY
CERTIFIES that the resolutions set forth below were duly adopted
by the Board of Directors of the Company pursuant to authority
conferred upon the Board of Directors by the provisions of the
Amended and Restated Certificate of Incorporation of the Company,
which authorizes the issuance of up to 2,400,000 shares of
Preferred Stock, par value $1.00 per share, and in accordance
with the provisions of Section 151 of the General Corporation Law
of the State of Delaware, respectively:
WHEREAS, the holders of all of the issued and
outstanding shares of the Company's Series B, Cumulative
Preferred Stock, par value $1.00 per share (the "Old Series B
Preferred Stock") wish to exchange such shares for the equivalent
number of shares of a new series of Preferred Stock to be
designated Amended Series B, Cumulative Convertible Preferred
Stock, plus additional shares of Amended Series B, Cumulative
Convertible Preferred Stock constituting payment in kind of all
accrued and unpaid dividends on the Old Series B Preferred Stock,
with the powers, preferences, rights and restrictions set forth
in Exhibit A hereto; and
WHEREAS, the Board deems it desirable and in the best
interests of the Company to effectuate such exchange; it was
RESOLVED, that, pursuant to such exchange, all of the
issued and outstanding shares of the Old Series B Preferred Stock
be reacquired by the Company from the holders thereof, Arbco
Associates, L.P., Kayne Anderson Non-Traditional Investments,
L.P., Offense Group Associates, L.P. and Opportunity Associates,
L.P., each a California limited partnership (the "Series B
Holders"), retired and cancelled, simultaneously with and in
exchange for the issuance of 44,465 shares of the Amended Series
B Preferred Stock (as defined below) to the Series B Holders, and
that the Company issue 2,260 shares of Amended Series B Preferred
Stock to the Series B Holders in payment of all accrued and
unpaid dividends on the Old Series B Preferred Stock, all such
newly issued shares of Amended Series B Preferred Stock to be
allocated among the Series B Holders pursuant to the request of
KAIM Non-Traditional, L.P., the general partner of each of the
Series B Holders; and
FURTHER RESOLVED, that the Company establish a new
series of Preferred Stock, par value $1.00 per share, to be
designated as Amended Series B, Cumulative Convertible Preferred
Stock ("Amended Series B Preferred Stock"), 70,000 shares of
which are hereby authorized for issuance; and
FURTHER RESOLVED, that the powers, preferences and
relative, participating, optional or other special rights, and
the qualifications, limitations and restrictions thereof, of the
Amended Series B Preferred Stock, in addition to those stated in
Article FOURTH of the Amended and Restated Certificate of
Incorporation which are applicable to all series of Preferred
Stock, are hereby established as set forth in the attached
Exhibit A; and.
FURTHER RESOLVED, that the Executive Committee of the
Board of Directors is hereby authorized to make such changes to
Exhibit A of this resolution as it may deem necessary or
desirable, except with respect to the voting rights provided for
therein.
IN WITNESS WHEREOF, the Company has caused its
corporate seal to be hereunto affixed and this certificate to be
signed by Benjamin Blanchet, its Executive Vice President, and
attested by Lisha Falk, its Secretary, this 3rd day of March,
1998.
XCL LTD.
/s/ Benjamin B. Blanchet
Benjamin Blanchet
Executive Vice President
[Corporate Seal]
ATTEST:
/s/ Lisha C. Falk
Lisha Falk
Secretary
EXHIBIT A
E. The Corporation shall have the authority to issue up
to 70,000 shares of Preferred Stock designated Amended Series B,
Cumulative Convertible Preferred Stock (the "Amended Series B
Preferred Stock"), each share of Amended Series B Preferred Stock
being identical with each other share of Amended Series B
Preferred Stock and all shares of Amended Series B Preferred
Stock having the following characteristics, rights and
preferences:
Paragraph 1. Designation and Amount.
The shares of this series of Preferred Stock shall be
designated as Amended Series B, Cumulative Convertible
Preferred Stock, par value of $1.00 per share ("Amended Series
B Preferred Stock"), and the number of shares constituting
such series shall be 70,000.
Paragraph 2. Definitions.
The following terms, not defined elsewhere herein,
shall have the following meanings:
"Amended Series A Preferred Stock" means the Amended
Series A, Cumulative Convertible Preferred Stock, par value
$1.00 per share, of the Company.
"The American Stock Exchange" means the American Stock
Exchange, Inc.
"Board of Directors" means the Board of Directors of
the Company as may be constituted from time to time.
"Business Day" means any day (other than a Saturday,
Sunday or public holiday in the Borough of Manhattan, City
of New York, New York) on which banking institutions in New
York City are not authorized or obligated by law or
executive order to close.
"Closing Price" of a security on any day means the last
sales price, regular way, per share of such security on such
day as reported in the principal consolidated reporting
system with respect to such security listed on The American
Stock Exchange or The New York Stock Exchange or, if the
shares of such security are not listed or admitted to
trading on The American Stock Exchange or The New York Stock
Exchange, the middle market quotations for the shares of
such security (derived from The London Stock Exchange Daily
Official List) listed or admitted to trading on The London
Stock Exchange, or if the shares of such security are not
listed or admitted to trading on The London Stock Exchange,
the last sales price as reported in the Nasdaq National
Market, or if the shares of such security are not listed or
admitted to trading in the Nasdaq National Market, the
average of the high bid and low asked prices in the over-the-
counter market as reported by the Nasdaq Stock Market, or if
the bid and asked prices on each such day shall not have
been reported through the Nasdaq Stock Market, the average
of the bid and asked prices for such day as furnished by any
New York Stock Exchange member firm regularly making a
market in such security selected for such purpose by the
Board of Directors or a committee thereof on each Trading
Day during such trading periods. In any of such alternate
cases when such security is not traded in prices expressed
in Dollars, such Closing Price shall be converted into
Dollars at the spot market exchange rate of pounds sterling
(UK) into Dollars as quoted by The Chase Manhattan Bank on
the date of determination.
"Common Stock" means the shares of common stock, par
value $.01 per share, of the Company.
"Company" or "XCL" means XCL Ltd., a Delaware
corporation.
"Directors" means the directors of the Company.
"Dividend Stock" means the shares of Common Stock or
Amended Series B Preferred Stock paid to holders of Amended
Series B Preferred Stock in lieu of a cash dividend as
provided in Section 3(b) hereof.
"$" means Dollars.
"Dollars" means the freely transferable currency of the
USA.
"Redemption Stock" means the shares of Common Stock
that may be issuable by the Company upon redemption of the
Amended Series B Preferred Stock as hereinafter provided.
"Shareholders" means the holders of the Common Stock.
"Stock Option Plans" means the Incentive and (non-
qualified) Stock Option Plans adopted by the Company for
employees and certain other individuals rendering services
to the Company.
"The London Stock Exchange" means The London Stock
Exchange Limited.
"The New York Stock Exchange" means The New York Stock
Exchange. Inc.
"Trading Day" means a day on which the market used for
calculating the Closing Price is open for the transaction of
business or, if the shares of such security are not so
listed or admitted to trading, a Business Day.
"Transfer Agent" means the transfer agent for the
Amended Series B Preferred Stock from time to time
obtaining.
"UK" and" "United Kingdom" means the United Kingdom of
Great Britain and Northern Ireland.
"USA" and "US" means the United States of America.
Paragraph 3. Dividends and Distributions.
(a) Each share of Amended Series B Preferred Stock
shall entitle the record holder to receive, out of funds
legally available therefor, when, as and if declared by the
Board of Directors, dividends in cash at the annual rate of
$9.50 per share, which shall be payable in arrears in equal
semi-annual installments on June 30th and December 31st, or
in the event any such date is a Saturday, Sunday or public
holiday in the Borough of Manhattan, the City of New York,
New York, on the first Business Day following such date
(hereinafter a "Dividend Payment Date") in each year,
provided, however, that the dividend payable on the first
such Dividend Payment Date occurring after March 3, 1998
shall be equal to the product obtained by multiplying $4.75
by a fraction, the denominator of which shall be 182 and the
numerator of which shall be the number of days expired in
the period between March 4, 1998 (the "Issuance Date") and
such first Dividend Payment Date (inclusive of both such
dates); provided, however, that if as of the tenth Business
Day prior to any such Dividend Payment Date the Board of
Directors has neither (i) declared a cash dividend of $9.50
per share nor (ii) delivered written notice of the Company's
election to pay a dividend hereunder in kind in shares of
Common Stock or Amended Series B Preferred Stock, as elected
by the holder of the Amended Series B Preferred Stock, the
Company shall, to the extent legally and contractually
permitted, declare a dividend and use its best efforts to
pay such dividend in shares of Common Stock or Amended
Series B Preferred Stock, as elected by the holder of the
Amended Series B Preferred Stock, as set forth in sub-
paragraph 3(b).
(b) The Company may, at its option exercised by
written notice to the holders of the Amended Series B
Preferred Stock given at least ten (10) Business Days prior
to the Dividend Payment Date, elect to pay any dividend due
and payable hereunder, and the Company shall to the extent
required by sub-paragraph 3(a), in kind in shares of either
Common Stock or Amended Series B Preferred Stock, at the
option of the holder, in-lieu of a dividend payment in cash.
The amount of shares of Dividend Stock issuable to each
holder of Amended Series B Preferred Stock pursuant to this
sub-paragraph 3(b) on each such Dividend Payment Date shall
equal 0.0475 shares of Dividend Stock per share of Amended
Series B Preferred Stock held by such holders if the
Dividend Stock is Amended Series B Preferred Stock and 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 if the Dividend Stock is Common Stock. No
fractional shares of Dividend Stock shall be issued by the
Company. Instead of any fractional share of Dividend Stock
that would otherwise be issuable to a holder by way of a
dividend on the Amended Series B Preferred Stock, the
Company shall either (i) pay a cash adjustment in respect of
such fractional share in an amount equal to the same
fraction of $4.75 computed to the nearest whole cent or (ii)
aggregate all such fractional shares into a whole number of
shares and sell such aggregated fractional shares on behalf
of the holders entitled thereto in a public or private sale
and distribute the net cash proceeds from the sale thereof
to such holders pro rata. If the Company shall elect so to
aggregate and sell such fractional shares, it shall endeavor
to use its best efforts to secure the best available sales
price for such shares but shall not be obligated to secure
the highest price obtainable for such shares. The amount of
Dividend Stock issuable to a holder by way of a dividend
shall be computed on the basis of the aggregate number of
shares of Amended Series B Preferred Stock registered in
such holder's name on the record date fixed for the payment
of such dividend. Dividends payable on the Amended Series B
Preferred Stock for any period less than a full semi-annual
period shall be computed on the basis of a 360-day year of
twelve 30-day months.
(c) Dividends shall be cumulative, whether or not
earned and whether or not surplus shall be available
therefor and shall commence to accrue and accumulate from
day to day from the Issuance Date. Such accumulation shall
include, if not paid, the dividend payable on such Dividend
Payment Date. Accrued but unpaid dividends shall not bear
interest. Such dividends shall be declared and set apart or
paid before any dividends (other than dividends payable in
Common Stock) shall be paid on the Common Stock. No
dividend shall be paid upon or set apart for shares of any
other class of stock of XCL (other than shares of preference
stock ranking pari passu with the Amended Series B Preferred
Stock) until all dividend arrears on the Amended Series B
Preferred Stock shall be fully paid. The shares of Amended
Series B Preferred Stock shall rank pari passu with the
shares of the Amended Series A Preferred Stock with respect
to the payment of dividends.
(d) Dividends paid on the shares of Amended Series B
Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such
shares shall be allocated pro-rata on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of
holders of Amended Series B Preferred Stock entitled to
receive payment of a dividend declared thereon, which record
date shall be no more than sixty days prior to the date
fixed for the payment thereof.
Paragraph 4. Dissolution, Liquidation or Winding Up.
In the event of any dissolution, liquidation or winding
up of the affairs of XCL, after payment or provision for
payment of the debts and other liabilities of XCL, the
registered holders of Amended Series B Preferred Stock shall
be entitled to share on a pro rata basis with the shares of
Amended Series A Preferred Stock and all other series of
XCL's preference stock ranking on a parity with the Amended
Series B Preferred Stock in respect of distributions upon
dissolution, liquidation or winding up of the Company and to
receive, out of the net assets of XCL, $100.00 per share,
plus an amount equal to all the dividend arrears on each
such share up to the date fixed for distribution and no
more, before distribution shall be made to the holders of
the Common Stock or any other shares ranking junior to the
Amended Series B Preferred Stock in respect of distributions
upon dissolution, liquidation or winding up of the Company.
Neither the merger or consolidation of XCL, nor the sale,
lease or conveyance of all or a part of its assets, shall be
deemed to be a dissolution, liquidation or winding up of the
affairs of XCL within the meaning of this Paragraph 4.
Paragraph 5. Redemption.
The Amended Series B Preferred Stock shall be
redeemable at the redemption price specified below and on
the following terms and conditions:
(a) Amended Series B Preferred Stock is redeemable at
the option of the holder at any time after December 21, 2001
("Optional Redemption"), at $100.00 per share plus an amount
equal to the accrued and unpaid dividends thereon to the
Redemption Date (as hereinafter defined), whether or not
earned and whether or not surplus is available therefor,
payable out of funds legally available therefor. In order
to exercise an Optional Redemption, such holder must give
written notice of such redemption to the Company ninety (90)
calendar days prior to the redemption date ("Redemption
Date"). In the event funds are legally available to redeem
only a portion of the Amended Series B Preferred Stock
outstanding, such funds shall be applied to redemption to
the extent available and the shares to be redeemed shall be
selected by lot as determined by the Board of Directors and
the remainder of the shares to be redeemed shall be promptly
redeemed as funds become legally available. Each holder so
electing to have the Company redeem its shares of Amended
Series B Preferred Stock shall elect such redemption with
respect to at least 5,000 such shares registered in its name
on the Redemption Date; provided, however, that a holder of
less than 16,667 shares of Amended Series B Preferred Stock
so electing to have the Company redeem any of its shares of
Amended Series B Preferred Stock shall elect such redemption
with respect to all such shares registered in its name on
the Redemption Date.
(b) In the event of an Optional Redemption, the
Company may elect, at its option, to pay the redemption
price by issuing shares of Redemption Stock to those holders
of Amended Series B Preferred Stock who have elected to
redeem their shares of Amended Series B Preferred Stock,
provided the Company's Common Stock is then listed on The
American Stock Exchange, The New York Stock Exchange or The
London Stock Exchange or is admitted to trading in Nasdaq
National Market. In the event the Company elects to pay the
redemption price in shares of Redemption Stock, the Company
shall advise the holders by written notice within thirty
(30) calendar days after receipt of written notice of such
holders' election to redeem shares of Amended Series B
Preferred Stock. The number of shares of Redemption Stock
so to be issued to such holders shall equal the product of
the number of shares of Amended Series B Preferred Stock
registered in the name of each such holder, multiplied by
the quotient obtained by dividing the sum of $100.00 plus an
amount equal to the accrued and unpaid dividends on each
share of Amended Series B Preferred Stock to the Redemption
Date by the lowest average Closing Price per share of the
Common Stock as calculated for the last 5, 10 and 30 Trading
Days preceding the Redemption Date. Issuance and delivery
of the Redemption Stock to such holders shall be effected by
the Company or the Redemption Agent (as hereinafter defined)
in the same manner and to the same effect as the payment of
the redemption price in cash in accordance with the
procedures set forth in sub-paragraph 5(c) below.
(c) If a holder of record submits to the Company, on
or prior to a Redemption Date, the certificate or
certificates for the Amended Series B Preferred Stock to be
redeemed, with the redemption notice thereon appropriately
completed, the redemption price shall be payable as soon as
practicable thereafter, but in any event no later than ten
(10) Business Days after receipt of such certificate or
certificates. The Company may deposit the aggregate
redemption price in trust with a bank or trust company (in
good standing, organized under the laws of the United States
of America or of the State of New York, doing business in
the Borough of Manhattan, City of New York, New York, and
having capital surplus and undivided profits aggregating at
least $25,000,000) as the "Redemption Agent", for payment to
the holders so the shares so to be redeemed, upon surrender
(and endorsement, if required by the Board of Directors) of
the certificates for such shares. Upon a Redemption Date
(unless the Company shall fail to make payment or deposit of
the redemption price as above set forth), each holder of the
shares of Amended Series B Preferred Stock so to be redeemed
shall cease to be a shareholder with respect to such shares
and shall have no interest in, or claim against, the Company
and shall have no voting or other rights with respect to
such shares, except the right to receive the moneys payable
upon such redemption from such bank or trust company, or
from the Company, without interest thereon, upon surrender
(and endorsement if required by the Board of Directors) of
the certificates; and the shares represented thereby shall
no longer be deemed to be outstanding. In the event the
holder of any shares of Amended Series B Preferred Stock
shall not, within six years after such deposit claim the
amount deposited as above stated for the redemption thereof,
the depositary shall, upon demand, pay over to the Company
such unclaimed amount so deposited, and the depositary shall
thereupon be relieved of all responsibility therefor to such
holder.
(d) Notwithstanding anything to the contrary
contained herein, if, in the event of an Optional
Redemption, the Company is unable to redeem all of the
shares of Amended Series B Preferred Stock because such
redemption would violate the applicable laws of the State of
Delaware, or if such redemption would create any liability
on the part of the directors of the Company under any
provisions of the Delaware General Corporation Law or any
successor law thereto, then the Company shall redeem only
such number of shares as shall not violate such laws or
create such liability and shall redeem all remaining shares
subject to the redemption notice as soon thereafter as the
restrictions precluding such redemption or imposing such
liability shall no longer be applicable.
Paragraph 6. Voting Rights.
Except as may be otherwise provided herein or in this
Restated Certificate of Incorporation of XCL, as amended
from time to time with the consent of the holders of Amended
Series B Preferred Stock, provided such consent is required
to be obtained hereunder, or as required by applicable law:
(a) The Amended Series B Preferred Stock shall vote
together with the Common Stock of the Company as a single
class on all actions to be taken by the stockholders of the
Company. Each share of Amended Series B Preferred Stock
shall entitle the holder thereof to cast 50 votes on all
matters on which the Amended Series B Preferred Stock shall
vote with the Common Stock. No adjustment shall be made in
the voting rights per share of the Amended Series B
Preferred Stock on any matters (including, without
limitation, the voting rights set forth in this Section 6
and in Sections 7 and 8 hereof) upon any increase or
decrease in the number of shares outstanding of any class of
stock which is also entitled to vote on such matters;
(b) The Amended Series B Preferred Stock shall vote as
a separate class on any resolution proposed for adoption by
the stockholders of the Company which seeks to amend, alter
or repeal, the provisions of XCL's Restated Certificate of
Incorporation or of the resolutions contained in the
Certificate of Designation of the Amended Series B Preferred
Stock designating the Amended Series B Preferred Stock and
the preferences and privileges, relative, participating,
optional or other special rights and qualifications,
limitations and restrictions thereof, so as to adversely
affect any right, preference, privilege or voting power of
the Amended Series B Preferred Stock or the holders thereof;
provided, however, that any increase in the amount of the
issued Amended Series B Preferred Stock or the creation and
issue of other series of preference stock (whether or not
denominated in Dollars), or any increase in the amount of
authorized shares of Amended Series B Preferred Stock, in
each case either being Parity Stock (as defined below) or
junior to the Amended Series B Preferred Stock with respect
to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up and with or
without similar voting rights will not be deemed to affect
adversely such rights, preferences, privileges or voting
powers of the Amended Series B Preferred Stock;
(c) Except in the event that arrangements are or have
been offered to the holders of the Amended Series B
Preferred Stock which ensure that the rights of such holders
would not be prejudiced, XCL will ensure that no plan of
compromise or arrangement affecting the Common Stock shall
become effective unless the holders of the Amended Series B
Preferred Stock shall be parties to the plan and unless the
plan shall be approved by the holders of at least two thirds
of the then issued and outstanding shares of Amended Series
B Preferred Stock, voting as a class together with all other
series of preference stock ranking on a parity with the
Amended Series B Preferred Stock as to the right to receive
any dividends and any payment or distribution of assets upon
dissolution, liquidation or winding up (herein referred to
as "Parity Stock"). The Amended Series A Preferred Stock
shall be deemed Parity Stock for all purposes herein.
(d) In the case of a vote on a resolution regarding
(i) the capital reorganization, dissolution or liquidation
of XCL; or (ii) any matter for which the consent of the
holders of Amended Series B Preferred Stock is sought in
accordance with the provisions of sub-paragraphs 6(b) or
6(c) or Paragraphs 7 or 8 hereof; every record holder of
Amended Series B Preferred Stock who is present at that
meeting in person or by proxy shall be entitled to cast one
(1) vote for each share of Amended Series B Preferred Stock
registered in its name (voting (A) as a separate class with
respect to the matters set forth in sub-paragraph 6(b) and
(B) together with all other Parity, Stock with respect to
the matters set forth in sub-paragraphs 6(c) and 6(d)(i) and
Paragraphs 7 and 8) and the decision of at least two thirds
of the votes cast at the meeting by such holders (as to any
matters set forth in clause (A) above) and such, holders and
the holders of any Parity Stock (as to any matters set forth
in clause (B) above) shall be determinative of the matter so
long as a quorum (as defined in sub-paragraph 6(e) below) is
present; provided that in the case of sub-paragraph 6(d)(ii)
above such consent may be sought without a meeting and shall
be deemed to be granted upon the receipt of the written
consent of at least two thirds of the then issued and
outstanding shares of stock entitled to vote on such matter
as a class.
(e) At each meeting of stockholders at which the
holders of the Amended Series B Preferred Stock shall have
the right to vote as a separate class or together with any
other class of stock, the presence in person or by proxy of
the holders of record of a majority of the total number of
shares of stock entitled to vote as a single class then
outstanding shall be necessary and sufficient to constitute
a quorum of such class for the transaction of business by
such stockholders as a class. At any such meeting or
adjournment thereof:
(i) the absence of a quorum of the holders of the
Amended Series B Preferred Stock shall not prevent the
election of Directors or the transaction of business
other than the transaction of business with respect to
which the holders of the Amended Series B Preferred Stock
are entitled to vote as a separate class and the absence
of a quorum of the holders of any other class of stock
for the election of Directors or the conduct of such
other business shall not prevent the conduct of business
on which the Amended Series B Preferred Stock is entitled
to vote as a separate class, and
(ii) in the absence of any such quorum, the holders
present in person or by proxy of the class or classes
which lack a quorum shall have the power to adjourn (for
a period of up to 30 days) the meeting for the election
of Directors which they are entitled to elect from time
to time, or for the conduct of such business, without
notice other than announcement at the meeting until a
quorum shall be present.
Paragraph 7. Further Issues: Par Value.
So long as any shares of Amended Series B Preferred
Stock remain outstanding, XCL will not without the
affirmative vote or consent of the holders of the Amended
Series B Preferred Stock and any Parity Stock, in each case
outstanding at the time, given in person or by proxy, either
in writing or at a meeting, (i) authorize, create or issue,
or increase the authorized or issued amount, of any class or
series of stock ranking senior to the Amended Series B
Preferred Stock with respect to payment of dividends or
distribution of assets on dissolution, liquidation or
winding up or which may be convertible into any class of
shares ranking as regards participation in dividends or the
distribution of assets on dissolution, liquidation or
winding up senior to the Amended Series B Preferred Stock;
or (ii) increase or decrease the par value of the Common
Stock.
Paragraph 8. Other Matters.
So long as any Amended Series B Preferred Stock remains
issued and outstanding then:
(a) except as authorized by the adoption of an
appropriate resolution by the affirmative vote or consent of
the holders of the Amended Series B Preferred Stock and any
Parity Stock in accordance with sub-paragraph 6(d):
(i) XCL will not purchase any of its own outstanding
shares of Common Stock otherwise than (A) in accordance
with XCL's Stock Option Plans to the extent Common Stock
is used to satisfy the exercise of stock options granted
thereunder; or (B) pursuant to a resolution of the
Shareholders adopted at an Extraordinary General Meeting
held on December 4, 1987; and
(ii) XCL shall cause the Group not to incur
Indebtedness which shall exceed in aggregate principal
amount an amount equal to 200 percent of the amount of
Shareholders' Equity of the Group as reported in XCL's
Latest Consolidated Balance Sheet.
For the purposes of sub-paragraph (ii) above:
(A) "Indebtedness" means all borrowed moneys and shall
be deemed to include to the extent not otherwise taken
into account:
(1) the principal amount raised in respect of loans
or acceptances by any bank or accepting house under any
loan facility or acceptance credit opened on behalf of
and in favor of XCL and any corporation a majority of
whose shares of voting securities are owned by XCL (a
"Subsidiary");
(2) the principal amount of any debentures (secured
or unsecured) of XCL or any Subsidiary; and
(3) the principal amount for which XCL is liable as
a guarantor of, or surety for the obligations of a
third party;
But shall not include, as determined in accordance with
generally accepted U.S. accounting principles:
(1) intra-Group debt;
(2) the amount of all consolidated current
liabilities of XCL and its Subsidiaries incurred in the
ordinary course of business, other than for current
maturities of long term debt and other than short term
borrowings;
(3) deferred revenues; and
(4) deferred U.S. taxes.
(B) "Shareholders' Equity" means the aggregate
amount appearing as shareholders' equity in the
applicable Latest Consolidated Balance Sheet as
determined in accordance with generally accepted US
accounting principles;
(C) "Latest Consolidated Balance Sheet" means at
any date the then latest published consolidated balance
sheet of the Group prepared in accordance with generally
accepted US accounting principles and which has been
audited and has been reported on by XCL's auditors for
the time being.
(D) "the Group" means XCL and its Subsidiaries from
time to time.
(b) XCL shall concurrently send a copy of every
report and financial statement sent to its Shareholders to
every holder of Amended Series B Preferred Stock.
Paragraph 9. Reacquired Shares.
Any shares of the Amended Series B Preferred Stock
redeemed or purchased or otherwise acquired by the Company
in any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued
shares of Amended Series B Preferred Stock, par value $1.00,
and may be reissued as Amended Series B Preferred Stock or
part of a new series of preference stock to be created by
resolution or resolutions of the Board of Directors, subject
to the conditions or restrictions on issuance set forth
herein.
Paragraph 10. Conversion Privilege
(a) Right of Conversion. At any time on or
after the earlier of the effective date of the
registration of the Conversion Stock (as defined herein)
under the Securities Act of 1933, as amended (the
"Securities Act") or August 31, 1998 (the "Conversion
Date"), each share of Amended Series B Preferred Stock
shall be convertible at the option of the holder thereof
into fully paid and nonassessable shares of Common Stock
("Conversion Stock"), at a conversion rate per full share
of Amended Series B Preferred Stock determined by
dividing $100.00 by the conversion price per share of
Common Stock in effect on the date such share is
surrendered for conversion, or into such additional or
other securities, cash or property and at such other
rates as required in accordance with the provisions of
this Paragraph 10, except that if shares have been called
for redemption, the conversion right will terminate as to
the shares called for redemption at 5:00 p.m. New York
City time, on the business day prior to the date fixed
for such redemption. For purposes of this resolution,
the "conversion price" per share of Amended Series B
Preferred Stock shall initially be (i) in the event the
Conversion Stock shall be registered under the Securities
Act, $4.75 or (ii) in the event the Conversion Stock
shall not be so registered, $3.80, and, in either case,
the conversion price shall be adjusted from time to time
in accordance with the provisions of this Paragraph 10.
For purposes of this resolution, the "conversion rate"
per share of Amended Series B Preferred Stock shall
initially be 21.0526 shares of Conversion Stock in the
event the Conversion Stock shall be registered under the
Securities Act and 26.3158 in the event the Conversion
Stock shall not be so registered and shall be adjusted
from time to time in accordance with the provisions of
this Paragraph 10. Each share of Amended Series B
Preferred Stock may be converted in whole only.
(b) Conversion Procedures. Any holder of
shares of Amended Series B Preferred Stock desiring to
convert such shares into Common Stock shall surrender the
certificate or certificates evidencing such shares of
Amended Series B Preferred Stock at the office of the
transfer agent for the Amended Series B Preferred Stock,
which certificate or certificates, if the Company shall
so require, shall be duly endorsed to the Company or in
blank, or accompanied by proper instruments of transfer
to the Company or in blank, accompanied by irrevocable
written notice to the Company that the holder elects to
convert such shares of Amended Series B Preferred Stock
and specifying the name or names (with address or
addresses) in which a certificate or certificates
evidencing shares of Common Stock are to be issued.
Except as otherwise described in Paragraph 10(i)
or in this sub-paragraph, no payments or adjustments in
respect of dividends on shares of Amended Series B
Preferred Stock surrendered for conversion, whether paid
or unpaid and whether or not in arrears, or on account of
any dividend on the Conversion Stock issued upon
conversion shall be made by the Company upon the
conversion of any shares of Amended Series B Preferred
Stock at the option of the holder. The holder of record
of shares of Amended Series B Preferred Stock on a
dividend record date who surrenders such shares for
conversion during the period between such dividend record
date and the corresponding Dividend Payment Date will be
entitled to receive the dividend on such Dividend Payment
Date notwithstanding the conversion of such shares;
provided, however, that unless such shares, prior to such
surrender, had been called for redemption on a redemption
date during the period between such dividend record date
and the Dividend Payment Date, such shares must be
accompanied, upon surrender for conversion, by payment
from the holder to the Company of an amount equal to the
dividend payable on such shares on that Dividend Payment
Date.
The Company shall, as soon as practicable after
such surrender of certificates evidencing shares of
Amended Series B Preferred Stock accompanied by the
written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer
agent to the person for whose account such shares of
Amended Series B Preferred Stock were so surrendered, or
to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to
which such person shall be entitled as aforesaid,
together with a cash adjustment in respect of any
fraction of a share of Common Stock as hereinafter
provided. Such conversion shall be deemed to have been
made as of the date of such surrender of the shares of
Amended Series B Preferred Stock to be converted, and the
person or persons entitled to receive the Common Stock
deliverable upon conversion of such Amended Series B
Preferred Stock shall be treated for all purposes as the
record holder or holders of such Common Stock on such
date.
(c) Adjustment of Conversion Price and
Conversion Rate. The conversion price at which a share
of Amended Series B Preferred Stock is convertible into
Common Stock, and the conversion rate at which shares of
Conversion Stock are issuable upon conversion of Amended
Series B Preferred Stock, shall be subject to adjustment
in certain events including, without duplication, the
following:
(i) In case the Company shall pay or make
a dividend or other distribution on its Common Stock
exclusively in Common Stock to all holders of its Common
Stock, the conversion price in effect at the opening of
business on the business day following the date fixed for
the determination of stockholders entitled to receive
such dividend or other distribution shall be reduced by
multiplying such conversion price by a fraction of which
the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the date
fixed for such determination and the denominator shall be
the sum of such number of shares and the total number of
shares constituting or included in such dividend or other
distribution, such reduction to become effective
immediately after the opening of business on the day
following the date fixed for such determination. For the
purposes of this paragraph (i), the number of shares of
Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company
shall not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the
Company.
(ii) In case the Company shall pay or
make a dividend or other distribution on its Common Stock
consisting exclusively of, or shall otherwise issue to
all holders of its Common Stock, rights or warrants
entitling the holders thereof to subscribe for or
purchase shares of Common Stock at a price per share less
than the Market Price per share (determined as provided
in paragraph (vi) of this Paragraph 10(c)) of the Common
Stock on the date fixed for the determination of
stockholders entitled to receive such rights or warrants,
the conversion price in effect at the opening of business
on the day following the date fixed for such
determination shall be reduced by multiplying such
conversion price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such
determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total
number of shares of Common Stock so offered for
subscription or purchase would purchase at such Market
Price and the denominator shall be the number of shares
of Common Stock outstanding at the close of business on
the date fixed for such determination plus the number of
shares of Common Stock so offered for subscription or
purchase, such reduction to become effective immediately
after the opening of business on the day following the
date fixed for such determination. In case any rights or
warrants referred to in this paragraph (ii) in respect of
which an adjustment shall have been made shall expire
unexercised, the conversion price shall be readjusted at
the time of such expiration to the conversion price that
would have been in effect if no adjustment had been made
on account of the distribution or issuance of such
expired rights or warrants.
(iii) In case outstanding shares of
Common Stock shall be subdivided into a greater number of
shares of Common Stock, the conversion price in effect at
the opening of business on the day following the day upon
which such subdivision becomes effective shall be
proportionately reduced, and conversely, in case
outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the
conversion price in effect at the opening of business on
the day following the day upon which such combination
becomes effective shall be proportionately increased,
such reduction or increase, as the case may be, to become
effective immediately after the opening of business on
the day following the day upon which such subdivision or
combination becomes effective.
(iv) Subject to the last sentence of this
paragraph (iv), in case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock
evidences of its indebtedness, shares of any class or
series of capital stock, cash or assets (including
securities, but excluding any rights or warrants referred
to in paragraph (ii) of this Paragraph 10(c), any
dividend or distribution paid exclusively in cash and any
dividend or distribution referred to in paragraph (i) of
this Paragraph 10(c)), the conversion price in effect on
the day following the date fixed for the payment of such
distribution (the date fixed for payment being referred
to as the "Reference Date") shall be reduced by
multiplying such conversion price by a fraction of which
the numerator shall be the Market Price per share
(determined as provided in paragraph (vi) of this
Paragraph 10(c)) of the Common Stock on the Reference
Date less the fair market value (as determined in good
faith by the Board of Directors, whose determination
shall be conclusive and described in a resolution of the
Board of Directors) on the Reference Date of the portion
of the evidences of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one
share of Common Stock, and the denominator shall be such
Market Price per share of the Common Stock, such
reduction to become effective immediately prior to the
opening of business on the day following the Reference
Date. If the Board of Directors determines the fair
market value of any distribution for purposes of this
paragraph (iv) by reference to the actual or when issued
trading market for any securities comprising such
distribution, it must in doing so consider the prices in
such market over the same period used in computing the
Market Price per share of Common Stock pursuant to
paragraph (vi) of this Paragraph 10(c). For purposes of
this paragraph (iv), any dividend or distribution that
includes shares of Common Stock or rights or warrants to
subscribe for or purchase shares of Common Stock shall be
deemed to be (A) a dividend or distribution of the
evidences of indebtedness, cash, assets or shares of
capital stock other than such shares of Common Stock or
rights or warrants (making any conversion price reduction
required by this paragraph (iv)) immediately followed by
(B) a dividend or distribution of such shares of Common
Stock or such rights or warrants (making any further
conversion price reduction required by paragraph (i) or
(ii) of this Paragraph 10(c)), except (1) the Reference
Date of such dividend or distribution as defined in this
paragraph (iv) shall be substituted as "the date fixed
for the determination of stockholders entitled to receive
such dividend or other distribution," "the date fixed for
the determination of stockholders entitled to receive
such rights or warrants" and "the date fixed for such
determination" within the meaning of paragraphs (i) and
(ii) of this Paragraph 10(c) and (2) any shares of Common
Stock included in such dividend or distribution shall not
be deemed "outstanding at the close of business on the
date fixed for such determination" within the meaning of
paragraph (i) of this Paragraph 10(c).
(v) In case the Company shall pay or make
a dividend or other distribution on its Common Stock in
cash (excluding (A) cash that is part of a distribution
referred to in paragraph (iv) above and (B) in the case
of any quarterly cash dividend on the Common Stock, the
portion thereof that does not exceed the per share amount
of the next preceding quarterly cash dividend on the
Common Stock (as adjusted to appropriately reflect any of
the events referred to in paragraphs (i), (ii), (iii),
(iv) and (v) of this Paragraph 10(c)), or all of such
quarterly cash dividend if the amount thereof per share
of Common Stock multiplied by four does not exceed 15% of
the Market Price per share (determined as provided in
paragraph (vi) of this Paragraph 10(c)) of the Common
Stock as of the trading day next preceding the date of
declaration of such dividend, the conversion price in
effect immediately prior to the opening of business on
the day following the date fixed for the payment for such
distribution shall be reduced by multiplying such
conversion price by a fraction of which the numerator
shall be the Market Price per share (determined as
provided in paragraph (vi) of this Paragraph 10(c)) of
the Common Stock on the date fixed for the payment of
such distribution less the amount of cash so distributed
and not excluded as provided above applicable to one
share of Common Stock, and the denominator of which shall
be such Market Price per share of the Common Stock, such
reduction to become effective immediately prior to the
opening of business on the day following the date fixed
for the payment of such distribution.
(vi) For the purpose of any computation
under paragraph (ii), (iii), (iv) or (v) of this
Paragraph 10(c) or Paragraph 10(d), the Market Price per
share of Common Stock on any date shall be deemed to be
the average of the Market Prices for the five consecutive
trading days ending with and including the date in
question; provided, however, that (A) if the "ex" date
(as hereinafter defined) for any event (other than the
issuance or distribution requiring such computation) that
requires an adjustment to the conversion price pursuant
to paragraph (i), (ii), (iii), (iv) or (v) above ("Other
Event") occurs after the fifth trading day prior to the
date in question and prior to the "ex" date for the
issuance or distribution requiring such computation (the
"Current Event"), the Market Price for each trading day
prior to the "ex" date for such Other Event shall be
adjusted by multiplying such Market Price by the same
fraction by which the conversion price is so required to
be adjusted as a result of such Other Event, (B) if the
"ex" date for any Other Event occurs after the "ex" date
for the Current Event and on or prior to the date in
question, the Market Price for each trading day on and
after the "ex" date for such Other Event shall be
adjusted by multiplying such Market Price by the
reciprocal of the fraction by which the conversion price
is so required to be adjusted as a result of such Other
Event, (C) if the "ex" date for any Other Event occurs on
the "ex" date for the Current Event, one of those events
shall be deemed for purposes of clauses (A) and (B) of
this proviso to have an "ex" date occurring prior to the
"ex" date for the other event, and (D) if the "ex" date
for the Current Event is on or prior to the date in
question, after taking into account any adjustment
required pursuant to clause (B) of this proviso, the
Market Price for each trading day on or after such "ex"
date shall be adjusted by adding thereto the amount of
any cash and the fair market value on the date in
question (as determined in good faith by the Board of
Directors in a manner consistent with any determination
of such value for purposes of paragraph (iv) or (v) of
this Paragraph 10(c), whose determination shall be
conclusive and described in a resolution of the Board of
Directors) of the portion of the rights, warrants,
evidences of indebtedness, shares of capital stock or
assets being distributed applicable to one share of
Common Stock. For purposes of this paragraph, the term
"ex" date, (1) when used with respect to any issuance or
distribution, means the first date on which the Common
Stock trades regular way on the relevant exchanges or in
the relevant market from which the Market Price was
obtained without the right to receive such issuance or
distribution and (2) when used with respect to any
subdivision or combination of shares of Common Stock,
means the first date on which the Common Stock trades
regular way on such exchange or in such market after the
time at which such subdivision or combination becomes
effective. As used in this Paragraph 10(c) or in
Paragraph 10(d), the term "Market Price" of the Common
Stock for any day means the last reported sale price,
regular way, on such day, or, if no sale takes place on
such day, the average of the reported closing bid and
asked prices on such day, regular way, in either case
reported on The American Stock Exchange Consolidated
Transaction Tape, or, if the Common Stock is not listed
or admitted to trading on The American Stock Exchange on
such day, on the principal national securities exchange
on which the Common Stock is listed or admitted to
trading, if the Common Stock is listed on a national
securities exchange, or the Nasdaq National Market or, if
not listed or admitted to trading on such quotation
system, on the principal quotation system on which the
Common Stock may be listed or admitted to trading or
quoted or, if not listed or admitted to trading or quoted
on any national securities exchange or quotation system,
the average of the closing bid and asked prices of the
Common Stock in the over-the-counter market on the day in
question as reported by the National Quotation Bureau
Incorporated, or similar generally accepted reporting
service, or, if not so available in such manner, as
furnished by any American Stock Exchange member firm
selected from time to time by the Board of Directors of
the Company for that purpose or, if not so available in
such manner, as otherwise determined in good faith by the
Board of Directors of the Company.
(vii) No adjustment in the conversion
price shall be required unless such adjustment would
require an increase or decrease of at least 1% in the
conversion price; provided, however, that any adjustments
which by reason of this paragraph (vii) are not required
to be made shall be carried forward and taken into
account in any subsequent adjustment.
(viii) Whenever the conversion price is
adjusted as herein provided:
(A) the Company shall make an appropriate
corresponding proportional adjustment to the conversion
rate which shall become effective when the adjustment to
the conversion price becomes effective;
(B) the Company shall compute the adjusted
conversion price and conversion rate and shall prepare a
certificate signed by a Vice President or the Treasurer
of the Company setting forth the adjusted conversion
price and conversion rate and showing in reasonable
detail the facts upon which such adjustments are based,
and such certificate shall forthwith be filed with the
transfer agent for the Amended Series B Preferred Stock;
and
(C) as soon as practicable after the
adjustments, the Company shall mail to all record holders
of Amended Series B Preferred Stock at their last
addresses as they shall appear in stock transfer books of
the Company a notice stating that the conversion price
and conversion rate have been adjusted and setting forth
the adjusted conversion price and conversion rate.
(ix) The Company from time to time may
reduce the conversion price or increase the conversion
rate by any amount for any period of time if the period
is at least twenty (20) days and the Board of Directors
has made a determination that such reduction (or
increase) would be in the best interest of the Company,
which determination shall be conclusive. Whenever the
conversion price is reduced (or the conversion rate
increased) pursuant to the preceding sentence, the
Company shall mail to the record holders of Amended
Series B Preferred Stock a notice of the reduction (or
increase) at least fifteen (15) days prior to the date
the reduced conversion price (or increased conversion
rate) takes effect, and such notice shall state the
reduced conversion price (or increased conversion rate)
and the period it will be in effect.
(d) No Fractional Shares. No fractional
shares of Common Stock shall be issued upon conversion of
the Amended Series B Preferred Stock. If more than one
certificate evidencing shares of Amended Series B
Preferred Stock shall be surrendered for conversion at
such time by the holder, the number of full shares
issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of Amended Series
B Preferred Stock so surrendered. Instead of any
fractional share of Common Stock that would otherwise be
issuable to a holder upon conversion of any shares of
Amended Series B Preferred Stock, the Company shall
either (i) pay a cash adjustment in respect of such
fractional share in an amount equal to the same fraction
of the Market Price for the shares of Common Stock as of
the day of such conversion or (ii) aggregate all such
fractional shares into a whole number of shares and sell
such aggregated fractional shares on behalf of the
holders entitled thereto in a public or private sale and
distribute the net cash proceeds from the sale thereof to
such holders pro rata. If the Company should so elect so
to aggregate and sell such fractional shares, it shall be
entitled to retain the services of a third party to
effect any such aggregation and/or sale and shall
endeavor to use its best efforts to secure the best
available sales price for such shares but shall not be
obligated to secure the highest price obtainable for such
shares.
(e) Reclassification, Consolidation, Merger or
Sale of Assets. In the event that the Company shall be a
party to any transaction pursuant to which the Common
Stock is converted into the right to receive other
securities, cash or other property (including, without
limitation, any recapitalization or reclassification of
the Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination
of the Common Stock), any consolidation of the Company
with, or merger of the Company into, any other person,
any merger of another person into the Company (other than
a merger which does not result in a reclassification,
conversion, exchange or cancellation of outstanding
shares of Common Stock), any sale or transfer of all or
substantially all of the assets of the Company or any
share exchange), then lawful provisions shall be made as
part of the terms of such transaction whereby the holder
of each share of Amended Series B Preferred Stock then
outstanding shall have the right thereafter to convert
such share only into the kind and amount of securities,
cash and other property receivable upon such transaction
by a holder of the number of shares of Common Stock into
which such share might have been converted immediately
prior to such transaction, provided, however, that if the
holders of Common Stock were entitled by the terms of the
transaction to make an election to receive securities,
cash or property, or any combination of the foregoing,
lawful provision shall be made as part of the terms of
such transaction whereby the holder of each share of
Amended Series B Preferred Stock then outstanding shall
have the right thereafter to convert such share only into
the kind and amount of securities, cash or other property
receivable upon such transaction by a holder of the
number of shares of Common Stock who made one of the
elections provided for in such transaction (as determined
by the Board of Directors, whose determination shall be
conclusive) into which such share might have been
converted immediately prior to such transaction. The
Company or the person formed by such consolidation or
resulting from such merger or which acquires such shares
or which acquires the Company's shares, as the case may
be, shall make provisions in its certificate or articles
of incorporation or other constituting document to
establish such right. Such certificate or articles of
incorporation or other constituting document shall
provide for adjustments which, for events subsequent to
the effective date of such certificate or articles of
incorporation or other constituting document, shall be as
nearly equivalent as may be practicable to the
adjustments provided for in this Paragraph 10. The above
provisions shall similarly apply to successive
transactions of the foregoing type.
(f) Reservation of Shares; Etc. The Company
shall at all times reserve and keep available, free from
preemptive rights out of its authorized and unissued
Common Stock and/or Common Stock held in treasury, solely
for the purpose of effecting the conversion of the
Amended Series B Preferred Stock, such number of shares
of its Common Stock as shall from time to time be
sufficient to effect the conversion of all shares of
Amended Series B Preferred Stock from time to time
outstanding. The Company shall from time to time, in
accordance with the laws of the State of Delaware, in
good faith and as expeditiously as possible, endeavor to
cause the authorized number of shares of Common Stock to
be increased (or combine or repurchase its outstanding
shares of Common Stock) if at any time the number of
shares of authorized and unissued Common Stock and/or
Common Stock held in treasury, shall not be sufficient to
permit the conversion of all the then outstanding shares
of Amended Series B Preferred Stock.
If any shares of Common Stock required to be
reserved for the purposes of conversion of the Amended
Series B Preferred Stock hereunder require registration
with or approval of any governmental authority under any
Federal or State law before such shares may be issued
upon conversion, the Company will in good faith and as
expeditiously as possible endeavor to cause such shares
to be duly registered or approved as the case may be. If
the Common Stock is listed on any national securities
exchange, the Company will, if permitted by the rules of
such exchange, list and keep listed on such exchange,
upon official notice of issuance, all shares of Common
Stock issuable upon conversion of the Amended Series B
Preferred Stock, for so long as the Common Stock
continues to be so listed.
(g) Prior Notice of Certain Events. In case:
(i) the Company shall (A) declare any
dividend (or any other distribution) on its Common Stock,
other than (1) a dividend payable in shares of Common
Stock or (2) a dividend payable in cash out of its
retained earnings other than any special or nonrecurring
or other extraordinary dividend or (B) declare or
authorize a redemption or repurchase of in excess of 10%
of the then outstanding shares of Common Stock; or
(ii) the Company shall authorize the
granting to all holders of Common Stock of rights or
warrants to subscribe for or purchase any shares of stock
of any class or series or of any other rights or
warrants; or
(iii) of any reclassification of Common
Stock (other than a subdivision or combination of the
outstanding Common Stock, or a change in par value, or
from par value to no par value, or from no par value to
par value), or of any consolidation or merger to which
the Company is party and for which approval of any
stockholders of the Company shall be required, or of the
sale or transfer of all or substantially all of the
assets of the Company or of any share exchange whereby
the Common Stock of the Company is converted into other
securities, cash or other property; or
(iv) of the voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then the Company shall cause to be filed with the
transfer agent for the Amended Series B Preferred Stock,
and shall cause to be mailed to all holders of record of
the Amended Series B Preferred Stock at their last
addresses as they shall appear upon the stock transfer
books of the Company, at least fifteen (15) days prior to
the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a
record (if any) is to be taken for the purpose of such
dividend, distribution, redemption, repurchase, or grant
of rights or warrants or, if a record is not to be taken,
the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
redemption, repurchase, rights or warrants are to be
determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding up is
expected to become effective and the date as of which it
is expected that holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock, for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding up
(but no failure to mail such notice or any defect therein
or in the mailing thereof shall affect the validity of
the corporate action required to be specified in such
notice).
(h) Certain Additional Rights. In case the
Company shall, by dividend or otherwise, declare or make
a distribution on its Common Stock referred to in
Paragraph 10(c)(iv) or 10(c)(v) (including, without
limitation, dividends or distributions referred to in the
last sentence of Paragraph 10(c)(iv)), the holder of each
share of Amended Series B Preferred Stock upon the
conversion thereof subsequent to the close of business on
the date fixed for the determination of stockholders
entitled to receive such distribution and prior to the
effectiveness of the conversion price adjustment in
respect of such distribution, shall be entitled to
receive for each share of Common Stock into which such
share of Amended Series B Preferred Stock is converted,
the portion of the shares of Common Stock, rights,
warrants, evidences of indebtedness, shares of capital
stock, cash and assets as distributed applicable to one
share of Common Stock; provided, however, that at the
election of the Company (whose election shall be
evidenced by a resolution of the Board of Directors) with
respect to all holders so converting, the Company may, in
lieu of distributing to such holder any portion of such
distribution not consisting of cash or securities of the
Company, pay such holder an amount in cash equal to the
fair market value thereof (as determined in good faith by
the Board of Directors, which determination shall be
conclusive). If any conversion of a share of Amended
Series B Preferred Stock described in the immediately
preceding sentence occurs prior to the payment date for a
distribution to holders of Common Stock which the holder
of the share of Amended Series B Preferred Stock so
converted is entitled to receive in accordance with the
immediately preceding sentence, the Company may elect
(such election to be evidenced by a resolution of the
Board of Directors) to distribute to such holder a due
bill for the shares of Common Stock, rights, warrants,
evidences of indebtedness, shares of capital stock, cash
or assets to which such holder is so entitled, provided
that such due bill (a) meets any applicable requirements
of the principal national securities exchange or other
market on which the Common Stock is then traded and
(b) requires payment or delivery of such shares of Common
Stock, rights, warrants, evidences of indebtedness,
shares of capital stock, cash or assets no later than the
date of payment or delivery thereof to holders of shares
of Common Stock receiving such distribution.
(i) Mandatory Conversion Right.
(i) At any time after August 31, 1998,
and provided that the Company is current in the payment
of dividends on the Amended Series B Preferred Stock to
the Mandatory Conversion Date, the Company may, at its
option, require the conversion of all the outstanding
shares of Amended Series B Preferred Stock into shares of
Common Stock as set forth below; provided that such
shares of Common Stock shall have been registered under
the Securities Act. The Company may exercise this option
only if for twenty (20) Trading Days within any period of
thirty (30) consecutive Trading Days, including the last
trading day of such period, the Current Market Price (as
defined in sub-paragraph (iii) below) of the Common Stock
equals or exceeds $11.25, such conversion price to be
subject to adjustments in the same manner and for the
same events as the conversion price in sub-paragraph
10(c) or elsewhere in this Paragraph 10. In order to
exercise its mandatory conversion option, the Company
must provide written notice to the holder of the Amended
Series B Preferred Stock, announcing the effective date
of the mandatory conversion of the Amended Series B
Preferred Stock (the "Mandatory Conversion Date") prior
to the opening of business on the second trading day
after any period in which the condition in the preceding
sentence has been met, but in no event prior to August
31, 1998. The press release shall announce the Mandatory
Conversion Date and provide the current conversion price,
current conversion rate and Current Market Price of the
Common Stock, in each case as of the close of business on
the trading day next preceding the date of the notice.
Effective on the Mandatory Conversion Date, all of the
issued and outstanding shares of Amended Series B
Preferred Stock shall be converted into fully paid and
non-assessable shares of Common Stock at such current
conversion price and current conversion rate set forth in
such press release in the manner provided in this
Paragraph 10. Effective as of the close of business on
the Mandatory Conversion Date, the shares of Amended
Series B Preferred Stock shall no longer be deemed to be
issued and outstanding and certificates evidencing such
Stock shall solely evidence the right to receive the
shares of Common Stock issuable in such conversion.
(ii) Notice of the exercise of the
Mandatory Conversion Right will be given by first-class
mail to the record holders of the Amended Series B
Preferred Stock not more than four (4) business days
after the Company issues the press release. The
Mandatory Conversion Date will be a date selected by the
Company not less than thirty (30) nor more than sixty
(60) days after the date on which the Company issues the
press release announcing its intention to exercise its
Mandatory Conversion Right.
(iii) The term "Current Market Price" of
the Common Stock for any day means the reported closing
bid price, regular way, on such day, as reported on The
American Stock Exchange, or, if the Common Stock is not
listed or admitted to trading on The American Stock
Exchange on such day, on the principal national
securities exchange on which the Common Stock is listed
or admitted to trading, if the Common Stock is listed on
a national securities exchange, or the Nasdaq National
Market or, if the Common Stock is not quoted or admitted
to trading on such quotations system, on the principal
quotation system in which the Common Stock may be listed
or admitted to trading or quoted or, if not listed or
admitted to trading or quoted on any national securities
exchange or quotation system, the average of the closing
bid and asked prices of the Common Stock in the over-the-
counter market on the day in question as reported by the
National Quotation Bureau Incorporated, or similar
generally accepted reporting service, or, if not so
available in such manner, as furnished by any American
Stock Exchange member firm selected from time to time by
the Board of Directors of the Company for that purpose
or, if not so available in such manner, as otherwise
determined in good faith by the Board of Directors of the
Company, which determination shall be conclusive.
Paragraph 11. Miscellaneous.
(a) All notices referred to herein shall be in
writing, and all notices hereunder shall be deemed to
have been given upon the earlier of receipt thereof or
three (3) Business Days after the mailing thereof if sent
by registered or certified mail (unless first-class mail
shall be specifically permitted for such notice under the
terms hereof) with postage prepaid, addressed: (i) if to
the Company, to its office as specified in its most
recent Annual Report on Form 10-K (or any successor
report or form) or to the Transfer Agent or other agent
of the Company designated as permitted thereby or (ii) if
to any holder of the Amended Series B Preferred Stock or
Common Stock, as the case may be, to such holder at the
address of such holder as listed in the stock record
books of the Company (which may include the records of
any Transfer Agent for the Amended Series B Preferred
Stock or Common Stock, as the case may be) or (iii) to
such other address as the Company or any such holder, as
the case may be, shall have designated by notice
similarly given.
(b) A copy of any notice given hereunder to any holder
of Amended Series B Preferred Stock shall be provided to Kayne
Anderson Management, Inc., 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067, unless otherwise
requested in writing by any such holder.
(c) The Company shall pay any and all stock transfer
and documentary stamp taxes that may be payable in respect of
any original issuance or delivery of shares of Amended Series
B Preferred Stock or shares of Common Stock or other
securities issued on account of Amended Series B Preferred
Stock pursuant hereto or certificates representing such shares
or securities. The Company shall not, however, be required to
pay any such tax which may be payable in respect of any
transfer involved in the issuance or delivery of shares of
Amended Series B Preferred Stock or Common Stock or other
securities in a name other than that in which the shares of
Amended Series B Preferred Stock with respect to which such
shares or other securities are issued or delivered were
registered (including, without limitation, any sales or
transfers of Redemption Stock arranged by the Company on
behalf of a holder of Amended Series B Preferred Stock), or in
respect of any payment to any person with respect to any such
shares or securities other than a payment to the registered
holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person
otherwise entitled to such issuance, delivery or payment has
made arrangements satisfactory to the Transfer Agent for the
payment to the Company of the amount of any such tax or has
established, to the satisfaction of the Company, that such tax
has been paid or is not payable.
Until after the third anniversary of the Issuance Date
neither the Company nor the Transfer Agent shall be required
to recognize or record on the books and records of the Company
or the Transfer Agent any transfer of any shares of Amended
Series B Preferred Stock to a person who is not a citizen or
resident of the United States of America without the prior
written consent of the Company to such transfer, which consent
shall not be unreasonably withheld, and the Company shall be
entitled to request and receive reasonable proof of the
citizenship or residency of any such proposed transferee
before authorizing the transfer of such shares of Amended
Series B Preferred Stock.
(d) In the event that a holder of shares of Amended
Series B Preferred Stock shall not by written notice designate
to whom payment upon redemption of shares of Amended Series B
Preferred Stock should be made or the address to which the
such payment, should be sent, the Company shall be entitled to
make such payment, in the name of the holder of such Amended
Series B Preferred Stock as shown on the records of the
Company and to send such payment, to the address of such
holder shown on the records of the Company.
(e) Unless otherwise provided in this Restated
Certificate of Incorporation of the Company, all payments in
the form of dividends, distributions on voluntary or
involuntary dissolution, liquidation or winding-up or
otherwise made upon the shares of Amended Series B Preferred
Stock and any other stock ranking on a parity with the Amended
Series B Preferred Stock with respect to such dividend or
distribution shall be made pro rata, so that amounts paid per
share on the Amended Series B Preferred Stock and such other
stock shall in all cases bear to each other the same ratio
that the required dividend distributions or payments, as the
case may be, then payable per share on the shares of the
Amended Series B Preferred Stock and such other stock bear to
each other.
(f) The Company may appoint, and from time to time
discharge and change, the Transfer Agent for the Amended
Series B Preferred Stock. Upon any such appointment or
discharge of a Transfer Agent, the Company shall send notice
thereof by first-class mail, postage prepaid, to each holder
of record of Amended Series B Preferred, Stock. The initial
Transfer Agent for the Amended Series B Preferred Stock shall
be the Company.
State of Delaware
Office of the Secretary of State
________________________________________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF CORRECTION OF "XCL LTD.", FILED IN
THIS OFFICE ON THE SIXTH DAY OF MARCH, A.D. 1998, AT 2:30 O'CLOCK
P.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
/s/ Edward J. Freel
[SEAL OF SECRETARY OF STATE] ____________________________
Edward J. Freel, Secretary of State
2147839 8100 AUTHENTICATION: 8961508
981088543 DATE: 03/10/98
CERTIFICATE OF CORRECTION FILED TO CORRECT
A CERTAIN ERROR IN THE CERTIFICATE OF
DESIGNATION OF XCL LTD.
FILED IN THE OFFICE OF THE SECRETARY OF STATE
OF DELAWARE ON MARCH 4, 1998
XCL Ltd., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY that:
1. The name of the corporation is XCL Ltd.
2. That a Certificate of Designation was filed by the
corporation with the Secretary of State of Delaware on March 4,
1998 and that said Certificate requires correction as permitted
by Section 103 of the General Corporation Law of the State of
Delaware.
3. The inaccuracy or defect of said Certificate to be
corrected is as follows:
The following sentence was misplaced at the end of
the definition of "Trading Day" instead of at the end of the
definition of "Closing Price": "In any of such alternate cases
when such security is not traded in prices expressed in Dollars,
such Closing Price shall be converted into Dollars at the spot
market exchange rate of pounds sterling (UK) into Dollars as
quoted by Manufacturers Hanover Trust Company on the date of
determination."
4. The definitions of "Closing Price" and "Trading Day" in
Paragraph 2 of the Certificate are corrected to read as follows:
"Closing Price" of a security on any day means the last
sales price, regular way, per share of such security on such day
as reported in the principal consolidated reporting system with
respect to such security listed on The American Stock Exchange or
The New York Stock Exchange or, if the shares of such security
are not listed or admitted to trading on The American Stock
Exchange or The New York Stock Exchange, the middle market
quotations for the shares of such security (derived from The
London Stock Exchange Daily Official List) listed or admitted to
trading on The London Stock Exchange, or if the shares of such
security are not listed or admitted to trading on The London
Stock Exchange, the last sales price as reported in the Nasdaq
National Market, or if the shares of such security are not listed
or admitted to trading in the Nasdaq National Market, the average
of the high bid and low asked prices in the over-the-counter
market as reported by the Nasdaq Stock Market, or if the bid and
asked prices on each such day shall not have been reported
through the Nasdaq Stock Market, the average of the bid and asked
prices for such day as furnished by any New York Stock Exchange
member firm regularly making a market in such security selected
for such purpose by the Board of Directors or a committee thereof
on each Trading Day during such Trading Periods. In any of such
alternate cases when such security is not traded in prices
expressed in Dollars, such Closing Price shall be converted into
Dollars at the spot market exchange rate of pounds sterling (UK)
into Dollars as quoted by Manufacturers Hanover Trust Company on
the date of determination.
"Trading Day" means a day on which the market used for
calculating the Closing Price is open for the transaction of
business or, if the shares of such security are not so listed or
admitted to trading, a Business Day.
IN WITNESS WHEREOF, said XCL Ltd. has caused this
Certificate to be signed by Lisha Falk, its Secretary, this 5th
day of March, 1998.
/s/ Lisha C. Falk
By Lisha Falk, Secretary
(Title)
State of Delaware
Office of the Secretary of State
________________________________________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF CORRECTION OF "XCL LTD.", FILED IN
THIS OFFICE ON THE NINETEENTH DAY OF MARCH, A.D. 1998, AT 4:30
O'CLOCK P.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
/s/ Edward J. Freel
[SEAL OF SECRETARY OF STATE] ____________________________
Edward J. Freel, Secretary of State
2147839 8100 AUTHENTICATION: 8984900
981107295 DATE: 03/23/98
CERTIFICATE OF CORRECTION FILED TO CORRECT
CERTAIN ERRORS IN THE CERTIFICATE OF
DESIGNATION OF XCL LTD.
FILED IN THE OFFICE OF THE SECRETARY OF STATE
OF DELAWARE ON MARCH 4, 1998
XCL Ltd., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY that:
1. The name of the corporation is XCL Ltd.
2. That a Certificate of Designation was filed by the
corporation with the Secretary of State of Delaware on March 4,
1998 and that said Certificate requires correction as permitted
by Section 103 of the General Corporation Law of the State of
Delaware.
3. The inaccuracies or defects of said Certificate to be
corrected are as follows:
(i) The reference to "Trading Periods" in the
penultimate sentence of the definition of "Closing Price" is to
be replaced with "trading periods."
(ii) The name "Manufacturers Hanover Trust
Company" in the last sentence of the definition of "Closing
Price" is to be replaced with "The Chase Manhattan Bank."
(iii) The definition of "Convertible Loan
Notes" is to be deleted in its entirety.
(iv) The reference to "The International Stock
Exchange of the United Kingdom and the Republic of Ireland
Limited" in the definition of "The London Stock Exchange" is to
be replaced with "The London Stock Exchange Limited."
(v) Clause (i) of sub-paragraph 8(a) is to be
deleted in its entirety, with the remaining clauses (ii) and
(iii) re-designated as clauses (i) and (ii), respectively.
(vi) The word "of" is to be inserted in new
clause (i) (formerly clause (ii)) of sub-paragraph 8(a)
immediately after the phrase "used to satisfy the exercise."
1. (a) The definitions of "Closing Price" and "The
London Stock Exchange Limited" in Paragraph 2 of the Certificate
are corrected to read as follows:
"Closing Price" of a security on any day means the last
sales price, regular way, per share of such security on such day
as reported in the principal consolidated reporting system with
respect to such security listed on The American Stock Exchange or
The New York Stock Exchange or, if the shares of such security
are not listed or admitted to trading on The American Stock
Exchange or The New York Stock Exchange, the middle market
quotations for the shares of such security (derived from The
London Stock Exchange Daily Official List) listed or admitted to
trading on The London Stock Exchange, or if the shares of such
security are not listed or admitted to trading on The London
Stock Exchange, the last sales price as reported in the Nasdaq
National Market, or if the shares of such security are not listed
or admitted to trading in the Nasdaq National Market, the average
of the high bid and low asked prices in the over-the-counter
market as reported by the Nasdaq Stock Market, or if the bid and
asked prices on each such day shall not have been reported
through the Nasdaq Stock Market, the average of the bid and asked
prices for such day as furnished by any New York Stock Exchange
member firm regularly making a market in such security selected
for such purpose by the Board of Directors or a committee thereof
on each Trading Day during such trading periods. In any of such
alternate cases when such security is not traded in prices
expressed in Dollars, such Closing Price shall be converted into
Dollars at the spot market exchange rate of pounds sterling (UK)
into Dollars as quoted by The Chase Manhattan Bank on the date of
determination.
"The London Stock Exchange" means the London Stock
Exchange Limited.
(b) Paragraph 2 of the Certificate is further
corrected by the deletion of the definition of "Convertible Loan
Notes" in its entirety from Paragraph 2.
(c) Paragraph 8 of the Certificate is corrected to
read as follows:
"Paragraph 8. Other Matters.
So long as any Amended Series B Preferred Stock remains
issued and outstanding then:
(a) except as authorized by the adoption of an
appropriate resolution by the affirmative vote or consent of
the holders of the Amended Series B Preferred Stock and any
Parity Stock in accordance with sub-paragraph 6(d):
(i) XCL will not purchase any of its own outstanding
shares of Common Stock otherwise than (A) in accordance
with XCL's Stock Option Plans to the extent Common Stock
is used to satisfy the exercise of stock options granted
thereunder; or (B) pursuant to a resolution of the
Shareholders adopted at an Extraordinary General Meeting
held on December 4, 1987; and
(ii) XCL shall cause the Group not to incur
Indebtedness which shall exceed in aggregate principal
amount an amount equal to 200 percent of the amount of
Shareholders' Equity of the Group as reported in XCL's
Latest Consolidated Balance Sheet.
For the purposes of sub-paragraph (ii) above:
(A) "Indebtedness" means all borrowed moneys and shall
be deemed to include to the extent not otherwise taken
into account:
(1) the principal amount raised in respect of loans
or acceptances by any bank or accepting house under any
loan facility or acceptance credit opened on behalf of
and in favor of XCL and any corporation a majority of
whose shares of voting securities are owned by XCL (a
"Subsidiary");
(2) the principal amount of any debentures (secured
or unsecured) of XCL or any Subsidiary; and
(3) the principal amount for which XCL is liable as
a guarantor of, or surety for the obligations of a
third party;
But shall not include, as determined in accordance with
generally accepted U.S. accounting principles:
(1) intra-Group debt;
(2) the amount of all consolidated current
liabilities of XCL and its Subsidiaries incurred in the
ordinary course of business, other than for current
maturities of long term debt and other than short term
borrowings;
(3) deferred revenues; and
(4) deferred U.S. taxes.
(B) "Shareholders' Equity" means the aggregate
amount appearing as shareholders' equity in the
applicable Latest Consolidated Balance Sheet as
determined in accordance with generally accepted US
accounting principles;
(C) "Latest Consolidated Balance Sheet" means at
any date the then latest published consolidated balance
sheet of the Group prepared in accordance with generally
accepted US accounting principles and which has been
audited and has been reported on by XCL's auditors for
the time being.
(D) "the Group" means XCL and its Subsidiaries from
time to time.
(b) XCL shall concurrently send a copy of every
report and financial statement sent to its Shareholders to
every holder of Amended Series B Preferred Stock."
IN WITNESS WHEREOF, said XCL Ltd. has caused this
Certificate to be signed by Lisha Falk, its Secretary, this __th
day of March, 1998.
/s/ Lisha C. Falk
By Lisha Falk, Secretary
(Title)
[Coopers & Lybrand Logo] Coopers & Lybrand L.L.P.
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of XCL Ltd. and Subsidiaries on Form
S-3 (File Nos. 33-41458, 33-83122 and 33-68552) and on Form
S-8 (File No. 33-62956 and 33-59799) of our report, which
includes 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
Subsidiaries as of December 31, 1997 and 1996, and for each
of the three years ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
April 10, 1998
H.J. GRUY AND ASSOCIATES, INC.
- ------------------------------------------------------------
1200 Smith Street, Suite 3040, Houston, Texas 77002 o FAX
(713) 739-6112 o (713)739-1000
April 13, 1997
The Board of Directors
XCL, Ltd.
110 Rue Jean Lafitte
Lafayette LA 70508
Gentlemen:
H. J. Gruy and Associates, Inc. hereby consents to the
filing of the Annual Report of Form 10-K of XCL, Ltd. in
accordance with the requirements of the Securities Act of
1933, with the inclusion in such filing of our report dated
April 9, 1998, as an exhibit thereto, and all references to
our name in the form and context in which they appear.
Very truly yours,
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
James H.Hartsock
Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of XCL Ltd. and Subsidiaries for the fiscal
year ended December 31, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 32,215
<SECURITIES> 0
<RECEIVABLES> 101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,967
<PP&E> 55,467
<DEPRECIATION> 1,000
<TOTAL-ASSETS> 119,089
<CURRENT-LIABILITIES> 11,568
<BONDS> 0
0
1,196
<COMMON> 217
<OTHER-SE> 39,412
<TOTAL-LIABILITY-AND-EQUITY> 119,089
<SALES> 236
<TOTAL-REVENUES> 236
<CGS> 0
<TOTAL-COSTS> 8,294
<OTHER-EXPENSES> (3,065)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,450
<INCOME-PRETAX> (13,443)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (551)
<CHANGES> 0
<NET-INCOME> (13,994)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
H.J. GRUY AND ASSOCIATES, INC.
1200 Smith Street, Suite 3040, Houston, Texas 77002 o FAX
(713) 739-6112 o (713) 739-1000
April 9, 1998
XCL, Ltd.
110 Rue Jean Lafitte
Lafayette, Louisiana 70508
Proved Reserves
Zhao Dong Block, China
98-202-104
Gentlemen:
At your request, we estimated the proved reserves and
future net cash flow as of January 1, 1998, attributable to
interests owned by XCL, Ltd. in the Zhao Dong Block, Bohai
Bay, China.
The estimated reserves, future net cash flow and
discounted future net cash flow are summarized by
reserve category as follows:
Estimated Estimated
Net Reserves Future Net Cash Flow
------------- ---------------------------
Discounted
Oil at 10%
(Barrels) Nondiscounted Per Year
--------- ------------- -----------
Proved Undeveloped 11,762,000 $ 129,105,000 $ 55,031,000
Apache Payment -0- $ 8,974,000 $ 7,416,000
----------- ------------ -----------
Total Proved 11,762,000 $ 138,079,000 $ 62,447,000
========== ============ ===========
The Apache Payment reflects an agreement by Apache
China Corporation LDC to pay XCL - China Ltd. sixteen and
two-thirds percent (16 2/3%) of the value of the Foreign
Contractor's share of the recoverable proved reserves in
the Producing Unit(s) located in the C field through the
Minghuazhen.
The discounted future net cash flows summarized in the
above table are computed using a discount rate of 10 percent
per annum.
Proved reserves are estimated in accordance with the
definitions contained in Securities and Exchange Commission
Regulation S-X, Rule 4-10 (a). The definitions are
included in part as
Attachment I.
Future net cash flow as presented herein is defined as the
future cash inflow attributable to the evaluated interest
in accordance with the production sharing agreement with
the Chinese National Oil and Gas Exploration and
Development Corporation (CNODC). Future costs of
abandoning the facilities and wells, and the restoration
of producing properties to satisfy environmental
standards are not deducted from the cash flow.
Estimates of future net cash flow and discounted future net
cash flow are not to be interpreted to represent the fair
market value for the estimated reserves. The estimated
reserves included in this report have not been adjusted for
risk.
For the economic forecasts presented in this report, the
oil prices are held constant at the initial value. Direct
operating costs and future capital expenditures are not
escalated and therefore remain constant for the
projected life of each property.
In conducting this evaluation, we relied on data supplied by
XCL, Ltd. The extent and character of ownership, oil
prices, direct operating costs, future capital
expenditures, accounting, geological, and engineering
data were accepted as represented. The development schedule
for currently undeveloped properties was supplied by XCL,
Ltd. No independent well tests, property inspections,
or audits of operating expenses were conducted by our
staff in conjunction with this evaluation. We did not
verify or determine the extent, character, status, or
liability, if any, of any current or possible future
detrimental environmental conditions.
Reserve estimates for these undeveloped reserves are
based on volumetric calculations and analogy with the
performance of comparable wells. Reserves estimates from
volumetric methods and from analogy comparisons are often
less certain than reserve estimates based on well
performance obtained over a period during which a
substantial portion of the reserve was produced. The
reserves reported herein are estimates only and should
not be construed as exact quantities. Future conditions
may affect recovery of estimated reserves and cash flows,
and reserves of all categories may be subject to revision
as more performance data become available.
In order to estimate the reserves, costs, and future cash
flows shown in this report, we have relied in part on
geological, engineering, and economic data furnished by our
client. Although we have made a best efforts attempt to
acquire all pertinent data and to analyze it carefully
with methods accepted by the petroleum industry, there
is no guarantee that the volumes of oil or the cash flows
projected will be realized. The reserve and cash flow
projections presented in this report may require
revision as additional data become available.
If investments or business decisions are to be made in
reliance on these estimates by anyone other than our
client, such person, with the approval of our client, is
invited to visit our offices at his expense so that he can
evaluate the assumptions made and the completeness and
extent of the data available on which our estimates are
based.
Any distribution or publication of this report or any
part
thereof must include this letter in its entirety.
Yours very truly,
H.J. GRUY AND ASSOCIATES, INC.
/s/ James H. Hartsock
James H. Hartsock, Ph.D., P.E.
Executive Vice President
/s/ Tommy Elkins
Tommy Elkins
Petroleum Consultant
JHH:akr
Attachment
C:\XCL\PROVRES.LTR
<PAGE>
ATTACHMENT I
DEFINITIONS OF PROVED OIL AND GAS RESERVES (1)
Proved Oil and Gas Reserves
- ----------------------------
Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas, and natural gas liquid which
geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes
in existing prices provided only by contractual
arrangements, but not on escalations based upon
future conditions.
Reservoirs are considered proved if economic
producibility is supported by either actual production
or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts,
if any, and (B) the immediately adjoining portions not
yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological
and engineering data. In the absence of information
on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the
reservoir.
Reserves which can be produced economically through
application of improved recovery techniques (such as fluid
injection) are included in the "proved" classification
when successful testing by a pilot project, or the
operation of an installed program in the reservoir,
provides support for the engineering analysis on which the
project or program was based.
Estimates of proved reserves do not include the following:
(A) oil that may become available from known reservoirs
but is classified separately as "indicated additional
reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; c crude oil, natural
gas, and natural gas liquids, that may occur in
undrilled prospects; and (D) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil
shales, coal, gilsonite and other such sources.
Proved Developed Oil and Gas Reserves
- -------------------------------------
Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells
with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the
application of fluid injection or other improved recovery
techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as
"proved developed reserves" only after testing by a pilot
project or after the operation of an installed program
has confirmed through production response that increased
recovery will be achieved.
Proved Undeveloped Reserves
- ---------------------------
Proved undeveloped oil and gas reserves are reserves that
are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves
on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of
production from the existing productive formation.
Under no circumstances should estimates for proved
undeveloped reserves be attributable to any acreage for
which an application of fluid injection or other
improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the
area and in the same reservoir.
(1) Contained in Securities and Exchange Commission Regulation
S-X, Rule 4-10 (a)
<PAGE>
XCL CHINA, LTD.
SUMMARY OF PROJECTED CASH FLOWS - VARIOUS PRELIMINARY
CASES ZHAO DONG CONCESSION
C-4 WELL: SEC CASE
- ------------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 48
TOTAL OIL REVENUES (M$) - - - 817
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - (714)
OPERATING EXPENSE (M$) - - - (99)
----- ---- ---- -----
NET CASH FLOW (M$) - - - 3
===== ==== ==== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 77 30 7 -
TOTAL OIL REVENUES (M$) 1,323 509 125 -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) (207) (138) (31) -
----- ---- ---- ----
NET CASH FLOW (M$) 1,117 371 94 -
===== ==== ==== ====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS - - - -
TOTAL OIL REVENUES (M$) - - - -
EXPLORATION EXPENSE (M$) - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) - - - -
OPERATING EXPENSE (M$) - - - -
---- ---- ---- ----
NET CASH FLOW (M$) - - - -
==== ==== ==== ====
TOTALS
------
NET FLOW RATE (MBBLS) 162
TOTAL OIL REVENUES (M$) 2,774
EXPLORATION EXPENSE (M$) -
SUBSEQUENT DEVELOPMENT
EXPENSE (M$) (714)
OPERATING EXPENSE (M$) (475)
-----
NET CASH FLOW (M$) 1,585
======
C BLOCK: SEC CASE
- -----------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 214
TOTAL OIL REVENUES - - - 3,565
EXPLORATION EXPENSE (15,817) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (3,212) (8,365)
OPERATING EXPENSE - - - 424
------ ---- ----- -----
NET CASH FLOW (15,817) - (3,212) (5,223)
====== ==== ===== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 907 738 494 380
TOTAL OIL REVENUES 15,130 12,325 8,250 6,345
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,300) - - -
OPERATING EXPENSE (1,620) (1,848) (1,626) (1,452)
------ ------ ----- -----
NET CASH FLOW 9,210 10,477 6,623 4,893
====== ====== ===== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 309 255 217 191
TOTAL OIL REVENUES 5,150 4,248 3,620 3,193
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,351) (1,278) (1,227) (1,164)
----- ----- ----- -----
NET CASH FLOW 3,799 2,970 2,393 2,029
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 171 154 139 122
TOTAL OIL REVENUES 2,857 2,578 2,312 2,042
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,105) (1,052) (392) (343)
----- ----- ----- -----
NET CASH FLOW 1,752 1,527 1,921 1,699
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 111 102 73 -
TOTAL OIL REVENUES 1,860 1,699 1,221 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (916) (890) (802) -
----- ----- ----- ----
NET CASH FLOW 944 809 419 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 4,577
TOTAL OIL REVENUES 76,395
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (15,877)
OPERATING EXPENSE (17,491)
-----
NET CASH FLOW 43,028
======
D BLOCK: SEC CASE
- -----------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 330
TOTAL OIL REVENUES - - - 5,502
EXPLORATION EXPENSE (24,409) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (4,957) (12,909)
OPERATING EXPENSE - - - (654)
------ ---- ----- ------
NET CASH FLOW (24,409) - (4,957) (8,061)
====== ==== ===== ======
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 1,388 1,128 755 581
TOTAL OIL REVENUES 23,169 18,824 12,603 9,705
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (6,636) - - -
OPERATING EXPENSE (2,500) (2,851) (2,510) (2,241)
------ ------ ------ -----
NET CASH FLOW 14,033 15,973 10,093 7,464
====== ====== ====== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 471 391 334 295
TOTAL OIL REVENUES 7,869 6,519 5,579 4,928
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,085) (1,972) (1,894) (1,797)
----- ----- ----- -----
NET CASH FLOW 5,784 4,547 3,685 3,131
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 264 238 215 190
TOTAL OIL REVENUES 4,409 3,979 3,585 3,168
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,706) (1,623) (937) (863)
----- ----- ----- -----
NET CASH FLOW 2,703 2,356 2,648 2,305
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 172 157 113 -
TOTAL OIL REVENUES 2,870 2,622 1,884 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (1,413) (1,374) (1,238) -
----- ----- ----- ----
NET CASH FLOW 1,457 1,248 646 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 7,023
TOTAL OIL REVENUES 117,215
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (24,502)
OPERATING EXPENSE (27,658)
------
NET CASH FLOW 65,055
=======
PAYMENT: 5.9% INTEREST
- ----------------------
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 66
TOTAL OIL REVENUES - - - 1,258
EXPLORATION EXPENSE (1,416) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE - - - (113)
----- ---- ---- -----
NET CASH FLOW (1,416) - - 1,145
===== ==== ==== =====
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 191 191 145 106
TOTAL OIL REVENUES 3,813 3,983 3,160 2,408
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,765) - - -
OPERATING EXPENSE (486) (554) (488) (436)
----- ----- ----- -----
NET CASH FLOW (1,437) 3,429 2,672 1,972
===== ===== ===== =====
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 86 72 62 55
TOTAL OIL REVENUES 2,047 1,789 1,603 1,484
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (405) (384) (368) (349)
----- ----- ----- -----
NET CASH FLOW 1,642 1,405 1,235 1,135
===== ===== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 50 45 4 37
TOTAL OIL REVENUES 1,407 1,333 1,265 1,174
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (332) (316) (229) (215)
----- ----- ----- -----
NET CASH FLOW 1,075 1,017 1,036 960
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 33 30 22 -
TOTAL OIL REVENUES 1,101 1,047 788 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (275) (267) (241) -
----- ----- ---- ----
NET CASH FLOW 826 780 547 -
===== ===== ==== ====
TOTALS
------
NET FLOW RATE (MBBLS) 1,231
TOTAL OIL REVENUES 29,660
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (4,765)
OPERATING EXPENSE (5,458)
-----
NET CASH FLOW 19,437
======
TOTAL
- -----
1996 1997 1998 1999
---- ---- ---- ----
NET FLOW RATE (MBBLS) - - - 657
TOTAL OIL REVENUES - - - 9,884
EXPLORATION EXPENSE (40,226) - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - (8,170) (21,987)
OPERATING EXPENSE - - - (1,177)
PARTNER PAYMENT - - - -
------ ---- ----- ------
NET CASH FLOW (40,226) - (8,170) (12,624)
====== ==== ===== ======
2000 2001 2002 2003
---- ---- ---- ----
NET FLOW RATE (MBBLS) 2,563 2,087 1,402 1,067
TOTAL OIL REVENUES 39,622 31,658 20,978 16,050
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE (10,936) - - -
OPERATING EXPENSE (4,327) (4,837) (4,167) (3,693)
PARTNER PAYMENT 8,974 - - -
------ ------ ------ ------
NET CASH FLOW 35,896 28,908 18,212 13,424
====== ====== ====== ======
2004 2005 2006 2007
---- ---- ---- ----
NET FLOW RATE (MBBLS) 866 717 613 542
TOTAL OIL REVENUES 13,018 10,767 9,199 8,122
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (3,436) (3,250) (3,122) (2,961)
PARTNER PAYMENT - - - -
------ ------ ----- -----
NET CASH FLOW 10,449 8,234 6,691 5,702
====== ====== ===== =====
2008 2009 2010 2011
---- ---- ---- ----
NET FLOW RATE (MBBLS) 485 438 395 349
TOTAL OIL REVENUES 7,265 6,557 5,898 5,210
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,811) (2,674) (1,329) (1,206)
PARTNER PAYMENT - - - -
----- ----- ----- -----
NET CASH FLOW 4,940 4,321 4,963 4,353
===== ===== ===== =====
2012 2013 2014 2015
---- ---- ---- ----
NET FLOW RATE (MBBLS) 316 289 208 -
TOTAL OIL REVENUES 4,730 4,321 3,105 -
EXPLORATION EXPENSE - - - -
SUBSEQUENT DEVELOPMENT
EXPENSE - - - -
OPERATING EXPENSE (2,328) (2,264) (2,041) -
PARTNER PAYMENT - - - -
----- ----- ----- ----
NET CASH FLOW 2,718 2,346 1,273 -
===== ===== ===== ====
TOTALS
------
NET FLOW RATE (MBBLS) 12,993
TOTAL OIL REVENUES 226,044
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT
EXPENSE (45,858)
OPERATING EXPENSE (51,081)
PARTNER PAYMENT 8,974
------
NET CASH FLOW 138,079
=======
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 1 MM BBL CASE
(C-4 WELL: SEC CASE)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) 0 208 342 132 32 -
CONS IND & COMM TAX (MBBLS) 0 10 17 7 2 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 0 125 205 79 19 -
OPERATING EXPENSES (M$) - 405 843 564 125 -
OPERATING EXPENSE VOLUME (MBBLS) - 24 49 33 7 -
INVESTMENT RECOVERY OIL (MBBLS) 0 101 156 46 12 -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - 2,915 - - - -
DEVELOPMENT RECOVERY (MBBLS) - 170 - - - -
DEVELOPMENT RECOVERY UTILIZED - 101 68 6 1 -
DEVELOPMENT COST CARRYOVER (MBBLS) - 68 - - - -
DEEMED INTEREST (MBBLS) - - 6 1 - -
TOTAL COST RECOVERY OIL (MBBLS) - 101 68 6 1 -
REMAINDER OIL (MBBLS) 0 73 208 86 23 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 0 4 10 4 1 -
ALLOCABLE REMAINDER OIL (MBBLS) 0 69 197 82 22 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 34 97 40 11 -
TOTAL CONTRACTOR OIL (MBBLS) 0 95 154 59 15 -
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) - - - - - -
CONS IND & COMM TAX (MBBLS) - - - - - -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) - - - - - -
OPERATING EXPENSES (M$) - - - - - -
OPERATING EXPENSE VOLUME (MBBLS) - - - - - -
INVESTMENT RECOVERY OIL (MBBLS) - - - - - -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) - - - - - -
X FACTOR - - - - - -
CHINESE SHARE OIL (MBBLS) - - - - - -
ALLOCABLE REMAINDER OIL (MBBLS) - - - - - -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) - - - - - -
TOTAL CONTRACTOR OIL (MBBLS) - - - - - -
2010 2011 2012 2013 2014 2015
---- ----- ---- ---- ---- ----
OIL PRICE ($BBL) 17.16 17.16 17.16 17.16 17.16 17.16
GROSS OIL VOLUME (MBBLS) - - - - - -
CONS IND & COMM TAX (MBBLS) - - - - - -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) - - - - - -
OPERATING EXPENSES (M$) - - - - - -
OPERATING EXPENSE VOLUME (MBBLS) - - - - - -
INVESTMENT RECOVERY OIL (MBBLS) - - - - - -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) - - - - - -
X FACTOR - - - - - -
CHINESE SHARE OIL (MBBLS) - - - - - -
ALLOCABLE REMAINDER OIL (MBBLS) - - - - - -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) - - - - - -
TOTAL CONTRACTOR OIL (MBBLS) - - - - - -
</TABLE>
<TABLE>
<CAPTION>
TOTALS
------
<S> <C>
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 715
CONS IND & COMM TAX (MBBLS) 36
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 429
OPERATING EXPENSES (M$) 1,937
OPERATING EXPENSE VOLUME (MBBLS) 113
INVESTMENT RECOVERY OIL (MBBLS) 316
EXPLORATION COSTS (M$) -
EXPLORATION RECOVERY (MBBLS) -
EXPLORATION RECOVERY ADJUSTMENT -
EXPLORATION RECOVERY UTILIZED -
EXPLORATION COST CARRYOVER (MBBLS) -
DEVELOPMENT COSTS (M$) 2,915
DEVELOPMENT RECOVERY (MBBLS) 170
DEVELOPMENT RECOVERY UTILIZED 177
DEVELOPMENT COST CARRYOVER (MBBLS) 68
DEEMED INTEREST (MBBLS) 7
TOTAL COST RECOVERY OIL (MBBLS) 177
REMAINDER OIL (MBBLS) 390
X FACTOR -
CHINESE SHARE OIL (MBBLS) 19
ALLOCABLE REMAINDER OIL (MBBLS) 370
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 181
TOTAL CONTRACTOR OIL (MBBLS) 323
</TABLE>
FOREIGN CONTRACTOR CASH FLOW (M$)
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
COST RECOVERY REVENUES - 1,051 989 328 66 -
ALLOCABLE REVENUES 0 582 1,658 689 183 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - (1,428) - - - -
OPERATING EXPENSE - (198) (413) (277) (61) -
----- ----- ----- ---- ----- ----
NET CASH FLOW 0 7 2,234 741 188 -
===== ===== ====== ==== ==== ====
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES - - - - - -
ALLOCABLE REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
----- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
COST RECOVERY REVENUES - - - - - -
ALLOCABLE REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
TOTALS
------
COST RECOVERY REVENUES 2,434
ALLOCABLE REVENUES 3,113
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (1,428)
OPERATING EXPENSE (949)
-----
NET CASH FLOW 3,170
=====
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 0 817 1,323 509 125 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - (714) - - - -
OPERATING EXPENSE - (99) (207) (138) (31) -
---- ---- ----- ---- ---- ----
NET CASH FLOW 0 3 1,117 371 94 -
===== ==== ===== ===== ===== ====
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
TOTAL OIL REVENUES - - - - - -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE - - - - - -
---- ---- ---- ---- ---- ----
NET CASH FLOW - - - - - -
==== ==== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 2,774
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (714)
OPERATING EXPENSE (475)
-----
NET CASH FLOW 1,585
======
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 1,153
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY CASE
ZHAO DONG CONCESSION: 18 MM BBL CASE
(C BLOCK: SEC CASE)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 0 0 0 629 2,664 2,912 2,187 1,672
CONS IND & COMM TAX (MBBLS) 0 0 0 31 133 146 109 84
ROYALTY (MBBLS) - - - - - - - -
COST RECOVERY OIL (MBBLS) 0 0 0 378 1,598 1,747 1,312 1,003
OPERATING EXPENSES (M$) - - - 1,729 6,613 7,541 6,639 5,927
OPERATING EXPENSE VOLUME (MBBLS) - - - 304 396 452 398 355
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 274 1,202 1,295 915 648
EXPLORATION COSTS (M$) 31,634 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 1,895 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (89) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 274 1,202 330 - -
EXPLORATION COST CARRYOVER (MBBLS) 1,806 1,806 1,806 1,532 330 - - -
DEVELOPMENT COSTS (M$) - - 13,112 34,141 17,551 - - -
DEVELOPMENT RECOVERY (MBBLS) - - 786 2,046 1,052 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - 965 915 648
DEVELOPMENT COST CARRYOVER (MBBLS) - 7 786 2,831 3,883 2,917 2,003 1,355
DEEMED INTEREST (MBBLS) - - - 71 261 373 296 207
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 274 1,202 1,295 915 648
REMAINDER OIL (MBBLS) 0 0 0 220 932 1,019 766 585
X FACTOR 0.950 0.950 0.950 0.950 0.912 0.907 0.921 0.937
CHINESE SHARE OIL (MBBLS) 0 0 0 11 82 95 60 37
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 209 850 924 705 548
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 103 417 453 346 269
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 427 1,813 1,477 989 760
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 1,350 1,114 949 838 757 684
CONS IND & COMM TAX (MBBLS) 68 56 47 42 38 34
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 810 668 570 503 454 411
OPERATING EXPENSES (M$) 5,514 5,216 5,010 4,753 4,511 4,292
OPERATING EXPENSE VOLUME (MBBLS) 330 313 300 285 270 257
INVESTMENT RECOVERY OIL (MBBLS) 480 356 269 218 184 153
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 480 356 269 218 32 -
DEVELOPMENT COST CARRYOVER (MBBLS) 875 519 249 32 - -
DEEMED INTEREST (MBBLS) 141 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 480 356 269 218 32 -
REMAINDER OIL (MBBLS) 473 390 332 293 418 393
X FACTOR 0.950 0.950 0.950 0.950 0.950 0.950
CHINESE SHARE OIL (MBBLS) 24 19 17 15 21 20
ALLOCABLE REMAINDER OIL (MBBLS) 449 370 316 278 397 373
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 220 182 155 136 194 183
TOTAL CONTRACTOR OIL (MBBLS) 617 509 434 383 342 309
2010 2011 2012 2013 2014 2015
---- ----- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 621 549 492 448 323 -
CONS IND & COMM TAX (MBBLS) 31 27 25 22 16 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 373 329 295 269 194 -
OPERATING EXPENSES (M$) 1,599 1,401 3,737 3,634 3,275 -
OPERATING EXPENSE VOLUME (MBBLS) 96 84 224 218 196 -
INVESTMENT RECOVERY OIL (MBBLS) 277 245 71 51 (2) -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - (2) -
EXPLORATION COST CARRYOVER (MBBLS) - - - - 2 -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - (2) -
REMAINDER OIL (MBBLS) 494 437 243 208 113 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 25 22 12 10 6 -
ALLOCABLE REMAINDER OIL (MBBLS) 470 415 231 198 107 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 230 204 113 97 53 -
TOTAL CONTRACTOR OIL (MBBLS) 277 245 223 204 146 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 18,190
CONS IND & COMM TAX (MBBLS) 910
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 10,914
OPERATING EXPENSES (M$) 71,391
OPERATING EXPENSE VOLUME (MBBLS) 4,277
INVESTMENT RECOVERY OIL (MBBLS) 6,637
EXPLORATION COSTS (M$) 31,634
EXPLORATION RECOVERY (MBBLS) 1,895
EXPLORATION RECOVERY ADJUSTMENT (89)
EXPLORATION RECOVERY UTILIZED 1,804
EXPLORATION COST CARRYOVER (MBBLS) 5,476
DEVELOPMENT COSTS (M$) 64,804
DEVELOPMENT RECOVERY (MBBLS) 3,883
DEVELOPMENT RECOVERY UTILIZED 3,883
DEVELOPMENT COST CARRYOVER (MBBLS) 15,449
DEEMED INTEREST (MBBLS) 1,348
TOTAL COST RECOVERY OIL (MBBLS) 5,686
REMAINDER OIL (MBBLS) 7,317
X FACTOR -
CHINESE SHARE OIL (MBBLS) 475
ALLOCABLE REMAINDER OIL (MBBLS) 6,842
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 3,353
TOTAL CONTRACTOR OIL (MBBLS) 9,155
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 5,419 23,306 17,094 10,732 8,206
ALLOCABLE REVENUES 0 0 0 1,711 6,955 7,555 5,767 4,485
EXPLORATION EXPENSE (31,634) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (6,425) (16,729) (8,600) - - -
OPERATING EXPENSE - - - (847) (3,240) (3,695) (3,253) (2,904)
----- ----- ----- ---- ----- ------ ------ -----
NET CASH FLOW (31,634) 0 (6,425) (10,446) 18,420 20,955 13,247 9,786
====== ===== ====== ====== ====== ====== ====== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 6,627 5,466 4,659 4,110 2,469 2,103
ALLOCABLE REVENUES 3,672 3,029 2,582 2,277 3,244 3,053
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (2,702) (2,556) (2,455) (2,329) (2,210) (2,103)
----- ----- ----- ----- ----- -----
NET CASH FLOW 7,597 5,940 4,785 4,058 3,503 3,053
===== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 784 687 1,831 1,780 1,564 -
ALLOCABLE REVENUES 3,841 3,397 1,889 1,617 878 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (784) (687) (1,831) (1,780) (1,605) -
---- ---- ----- ----- ----- ----
NET CASH FLOW 3,841 3,397 1,889 1,617 837 -
===== ===== ===== ===== ==== ====
TOTALS
------
COST RECOVERY REVENUES 96,836
ALLOCABLE REVENUES 55,954
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (31,754)
OPERATING EXPENSE (34,981)
------
NET CASH FLOW 86,055
======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> < c> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 3,565 15,130 12,325 8,250 6,345
EXPLORATION EXPENSE (15,817) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (3,212) (8,365) (4,300) - - -
OPERATING EXPENSE - - - (424) (1,620) (1,848) (1,626) (1,452)
---- ---- ----- ---- ----- ----- ----- -----
NET CASH FLOW (15,817) 0 (3,212) (5,223) 9,210 10,477 6,623 4,893
====== ==== ===== ===== ===== ====== ===== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 5,150 4,248 3,620 3,193 2,857 2,578
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (1,351) (1,278) (1,227) (1,164) (1,105) (1,052)
----- ----- ----- ----- ----- -----
NET CASH FLOW 3,799 2,970 2,393 2,029 1,752 1,527
===== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 2,312 2,042 1,860 1,699 1,221 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (392) (343) (916) (890) (802) -
---- ---- ---- ---- ---- ----
NET CASH FLOW 1,921 1,699 944 809 419 -
===== ===== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 76,395
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (15,877)
OPERATING EXPENSE (17,491)
------
NET CASH FLOW 43,028
======
INTERNAL RATE OF RETURN 75%
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 21,434
<PAGE>
<TABLE>
<CAPTION>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 28 MM BBL CASE
(D BLOCK: SEC CASE)
1996 1997 1998 1999 2000 2001 2002 2003
--- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 0 0 0 971 4,111 4,493 3,375 2,581
CONS IND & COMM TAX (MBBLS) 0 0 0 49 206 225 169 129
ROYALTY (MBBLS) - - - - - - - -
COST RECOVERY OIL (MBBLS) 0 0 0 583 2,467 2,696 2,025 1,548
OPERATING EXPENSES (M$) - - - 2,669 10,205 11,638 10,245 9,147
OPERATING EXPENSE VOLUME (MBBLS) - - - 160 611 697 614 548
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 423 1,855 1,999 1,411 1,000
EXPLORATION COSTS (M$) 48,818 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 2,925 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (138) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 423 1,855 509 - -
EXPLORATION COST CARRYOVER (MBBLS) 2,787 2,787 2,787 2,364 509 - - -
DEVELOPMENT COSTS (M$) - - 20,234 52,688 27,085 - - -
DEVELOPMENT RECOVERY (MBBLS) - - 1,212 3,157 1,623 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - 1,490 1,411 1,000
DEVELOPMENT COST CARRYOVER (MBBLS) - - 1,212 4,369 5,992 4,502 3,091 2,091
DEEMED INTEREST (MBBLS) - - - 109 403 576 457 319
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 423 1,855 1,999 1,411 1,000
REMAINDER OIL (MBBLS) 0 0 0 340 1,439 1,573 1,181 903
X FACTOR 0.950 0.950 0.950 0.950 0.881 0.876 0.895 0.913
CHINESE SHARE OIL (MBBLS) 0 0 0 17 171 195 124 78
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 323 1,268 1,378 1,057 825
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 158 621 675 518 404
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 659 2,776 2,256 1,510 1,163
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 2,084 1,719 1,465 1,292 1,169 1,056
CONS IND & COMM TAX (MBBLS) 104 86 73 65 58 53
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 1,250 1,032 879 775 701 634
OPERATING EXPENSES (M$) 8,509 8,050 7,732 7,334 6,961 6,624
OPERATING EXPENSE VOLUME (MBBLS) 510 482 463 439 417 397
INVESTMENT RECOVERY OIL (MBBLS) 741 549 416 336 284 237
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 741 549 416 336 49 -
DEVELOPMENT COST CARRYOVER (MBBLS) 1,350 801 385 49 - -
DEEMED INTEREST (MBBLS) 217 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 741 549 416 336 49 -
REMAINDER OIL (MBBLS) 729 602 513 452 644 606
X FACTOR 0.924 0.935 0.946 0.950 0.950 0.950
CHINESE SHARE OIL (MBBLS) 56 39 27 23 32 30
ALLOCABLE REMAINDER OIL (MBBLS) 674 563 485 430 612 576
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 330 276 238 211 300 282
TOTAL CONTRACTOR OIL (MBBLS) 943 781 669 591 528 477
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 16.69 16.69 16.69 16.69 16.69 16.69
GROSS OIL VOLUME (MBBLS) 959 847 759 692 498 -
CONS IND & COMM TAX (MBBLS) 48 42 38 35 25 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 575 508 455 415 299 -
OPERATING EXPENSES (M$) 3,826 3,520 5,767 5,608 5,054 -
OPERATING EXPENSE VOLUME (MBBLS) 229 211 346 336 303 -
INVESTMENT RECOVERY OIL (MBBLS) 346 297 110 79 (4) -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - (4) -
EXPLORATION COST CARRYOVER (MBBLS) - - - - 4 -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - (4) -
REMAINDER OIL (MBBLS) 682 593 375 321 174 -
X FACTOR 0.950 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 34 30 19 16 9 -
ALLOCABLE REMAINDER OIL (MBBLS) 648 564 356 305 166 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 317 276 175 150 81 -
TOTAL CONTRACTOR OIL (MBBLS) 430 380 344 314 226 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 28,072
CONS IND & COMM TAX (MBBLS) 1,404
ROYALTY (MBBLS) -
COST RECOVERY OIL (MBBLS) 16,843
OPERATING EXPENSES (M$) 112,889
OPERATING EXPENSE VOLUME (MBBLS) 6,764
INVESTMENT RECOVERY OIL (MBBLS) 10,079
EXPLORATION COSTS (M$) 48,818
EXPLORATION RECOVERY (MBBLS) 2,925
EXPLORATION RECOVERY ADJUSTMENT (138)
EXPLORATION RECOVERY UTILIZED 2,783
EXPLORATION COST CARRYOVER (MBBLS) 8,451
DEVELOPMENT COSTS (M$) 100,007
DEVELOPMENT RECOVERY (MBBLS) 5,992
DEVELOPMENT RECOVERY UTILIZED 5,992
DEVELOPMENT COST CARRYOVER (MBBLS) 23,842
DEEMED INTEREST (MBBLS) 2,081
TOTAL COST RECOVERY OIL (MBBLS) 8,775
REMAINDER OIL (MBBLS) 11,129
X FACTOR -
CHINESE SHARE OIL (MBBLS) 900
ALLOCABLE REMAINDER OIL (MBBLS) 10,229
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 5,012
TOTAL CONTRACTOR OIL (MBBLS) 14,046
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 8,363 35,966 26,381 16,563 12,663
ALLOCABLE REVENUES 0 0 0 2,640 10,371 11,268 8,644 6,747
EXPLORATION EXPENSE (48,818) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (9,915) (25,817) (13,272) - - -
OPERATING EXPENSE - - - (1,308) (5,001) (5,702) (5,020) (4,482)
------ ----- ----- ----- ----- ------ ------ ------
NET CASH FLOW (48,818) 0 (9,915) (16,121) 28,065 31,946 20,186 14,928
===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 10,227 8,436 7,189 6,342 3,810 3,246
ALLOCABLE REVENUES 5,511 4,602 3,969 3,515 5,007 4,712
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (4,169) (3,944) (3,789) (3,594) (3,411) (3,246)
----- ----- ----- ----- ----- ----
NET CASH FLOW 11,568 9,094 7,370 6,263 5,406 4,712
====== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 1,875 1,725 2,826 2,748 2,413 -
ALLOCABLE REVENUES 5,296 4,611 2,914 2,496 1,355 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (1,875) (1,725) (2,826) (2,748) (2,476) -
----- ----- ----- ----- ----- ----
NET CASH FLOW 5,296 4,611 2,914 2,496 1,292 -
===== ===== ===== ===== ===== ====
TOTALS
------
COST RECOVERY REVENUES 150,772
ALLOCABLE REVENUES 83,657
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (49,004)
OPERATING EXPENSE (55,315)
------
NET CASH FLOW 130,110
=======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (50% INTEREST)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 5,502 23,169 18,824 12,603 9,705
EXPLORATION EXPENSE (24,409) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - (4,957) (12,909) (6,636) - - -
OPERATING EXPENSE - - - (654) (2,500) (2,851) (2,510) (2,241)
---- ---- ----- ----- ----- ------ ------ -----
NET CASH FLOW (24,409) 0 (4,957) (8,061) 14,033 15,973 10,093 7,464
===== ==== ===== ===== ====== ====== ====== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 7,869 6,519 5,579 4,928 4,409 3,979
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (2,085) (1,972) (1,894) (1,797) (1,706) (1,623)
----- ----- ----- ----- ----- ----
NET CASH FLOW 5,784 4,547 3,685 3,131 2,703 2,356
===== ===== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 3,585 3,168 2,870 2,622 1,884 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (937) (863) (1,413) (1,374) (1,238) -
----- ----- ----- ----- ----- ----
NET CASH FLOW 2,648 2,305 1,457 1,248 646 -
===== ===== ===== ===== ===== ====
TOTALS
------
TOTAL OIL REVENUES 117,215
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (24,502)
OPERATING EXPENSE (27,658)
------
NET CASH FLOW 65,055
======
INTERNAL RATE OF RETURN 74% NET
PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 32,444
<PAGE>
XCL CHINA, LTD.
PROJECTED CASH FLOWS - PRELIMINARY SEC CASE
ZHAO DONG CONCESSION: 46 MM BBL CASE
(ESTIMATE OF PAYMENT: PROVED ONLY - ESCALATED PRICING)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OIL PRICE ($BBL) 16.32 17.32 18.32 19.14 19.99 20.88 21.80 22.76
GROSS OIL VOLUME (MBBLS) 0 0 0 1,600 6,775 7,405 5,563 4,253
CONS IND & COMM TAX (MBBLS) 0 0 0 80 339 370 278 213
ROYALTY (MBBLS) - - - - - 16 - -
COST RECOVERY OIL (MBBLS) 0 0 0 960 4,065 4,443 3,338 2,552
OPERATING EXPENSES (M$) - - - 3,914 16,818 19,179 16,884 15,075
OPERATING EXPENSE VOLUME (MBBLS) - - - 205 841 919 774 662
INVESTMENT RECOVERY OIL (MBBLS) 0 0 0 756 3,224 3,524 2,563 1,889
EXPLORATION COSTS (M$) 24,000 - - - - - - -
EXPLORATION RECOVERY (MBBLS) 1,471 - - - - - - -
EXPLORATION RECOVERY ADJUSTMENT (207) - - - - - - -
EXPLORATION RECOVERY UTILIZED 0 0 0 756 508 - - -
EXPLORATION COST CARRYOVER (MBBLS) 1,263 1,263 1,263 508 - - - -
DEVELOPMENT COSTS (M$) - - - - 164,811 - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - 8,244 - - -
DEVELOPMENT RECOVERY UTILIZED - - - - 2,716 3,524 2,500 225
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - 5,527 2,003 - -
DEEMED INTEREST (MBBLS) - - - - - 497 225 20
TOTAL COST RECOVERY OIL (MBBLS) 0 0 0 756 3,224 3,524 2,500 225
REMAINDER OIL (MBBLS) 0 0 0 560 2,371 2,576 2,010 3,153
X FACTOR 0.950 0.950 0.950 0.940 0.845 0.837 0.865 0.879
CHINESE SHARE OIL (MBBLS) 0 0 0 34 367 420 271 381
ALLOCABLE REMAINDER OIL (MBBLS) 0 0 0 526 2,004 2,156 1,739 2,772
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 0 0 0 258 982 1,056 852 1,358
TOTAL CONTRACTOR OIL (MBBLS) 0 0 0 1,114 3,233 3,233 2,457 1,793
2004 2005 2006 2007 2008 2009
----- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 23.76 24.80 25.88 27.00 28.17 29.38
GROSS OIL VOLUME (MBBLS) 3,435 2,833 2,415 2,130 1,926 1,741
CONS IND & COMM TAX (MBBLS) 172 142 121 106 96 87
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 2,061 1,700 1,449 1,278 1,156 1,044
OPERATING EXPENSES (M$) 14,023 13,266 12,742 12,087 11,472 10,916
OPERATING EXPENSE VOLUME (MBBLS) 590 535 492 448 407 372
INVESTMENT RECOVERY OIL (MBBLS) 1,471 1,165 956 830 748 673
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED 20 2 - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) 2 - - - - -
TOTAL COST RECOVERY OIL (MBBLS) 20 2 - - - -
REMAINDER OIL (MBBLS) 2,652 2,155 1,801 1,576 1,423 1,282
X FACTOR 0.893 0.909 0.916 0.923 0.928 0.934
CHINESE SHARE OIL (MBBLS) 283 196 151 122 102 84
ALLOCABLE REMAINDER OIL (MBBLS) 2,370 1,959 1,651 1,454 1,320 1,198
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 1,161 960 809 712 647 587
TOTAL CONTRACTOR OIL (MBBLS) 1,460 1,223 1,050 932 847 769
2010 2011 2012 2013 2014 2015
----- ---- ---- ---- ---- ----
OIL PRICE ($BBL) 30.64 31.95 33.32 34.74 36.22 37.75
GROSS OIL VOLUME (MBBLS) 1,580 1,395 1,250 1,140 821 -
CONS IND & COMM TAX (MBBLS) 79 70 63 57 41 -
ROYALTY (MBBLS) - - - - - -
COST RECOVERY OIL (MBBLS) 948 837 750 684 493 -
OPERATING EXPENSES (M$) 7,925 7,422 9,504 9,241 8,329 -
OPERATING EXPENSE VOLUME (MBBLS) 259 232 285 266 230 -
INVESTMENT RECOVERY OIL (MBBLS) 689 605 465 418 263 -
EXPLORATION COSTS (M$) - - - - - -
EXPLORATION RECOVERY (MBBLS) - - - - - -
EXPLORATION RECOVERY ADJUSTMENT - - - - - -
EXPLORATION RECOVERY UTILIZED - - - - - -
EXPLORATION COST CARRYOVER (MBBLS) - - - - - -
DEVELOPMENT COSTS (M$) - - - - - -
DEVELOPMENT RECOVERY (MBBLS) - - - - - -
DEVELOPMENT RECOVERY UTILIZED - - - - - -
DEVELOPMENT COST CARRYOVER (MBBLS) - - - - - -
DEEMED INTEREST (MBBLS) - - - - - -
TOTAL COST RECOVERY OIL (MBBLS) - - - - - -
REMAINDER OIL (MBBLS) 1,242 1,093 902 817 550 -
X FACTOR 0.941 0.950 0.950 0.950 0.950 -
CHINESE SHARE OIL (MBBLS) 73 55 45 41 28 -
ALLOCABLE REMAINDER OIL (MBBLS) 1,169 1,039 857 776 523 -
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 573 509 420 380 256 -
TOTAL CONTRACTOR OIL (MBBLS) 700 623 560 511 369 -
</TABLE>
TOTALS
------
OIL PRICE ($BBL)
GROSS OIL VOLUME (MBBLS) 46,263
CONS IND & COMM TAX (MBBLS) 2,313
ROYALTY (MBBLS) 16
COST RECOVERY OIL (MBBLS) 27,758
OPERATING EXPENSES (M$) 188,796
OPERATING EXPENSE VOLUME (MBBLS) 7,517
INVESTMENT RECOVERY OIL (MBBLS) 20,240
EXPLORATION COSTS (M$) -
EXPLORATION RECOVERY (MBBLS) -
EXPLORATION RECOVERY ADJUSTMENT (207)
EXPLORATION RECOVERY UTILIZED 1,263
EXPLORATION COST CARRYOVER (MBBLS) 3,035
DEVELOPMENT COSTS (M$) 164,811
DEVELOPMENT RECOVERY (MBBLS) 8,244
DEVELOPMENT RECOVERY UTILIZED 8,988
DEVELOPMENT COST CARRYOVER (MBBLS) 7,530
DEEMED INTEREST (MBBLS) 745
TOTAL COST RECOVERY OIL (MBBLS) 10,252
REMAINDER OIL (MBBLS) 26,164
X FACTOR -
CHINESE SHARE OIL (MBBLS) 2,652
ALLOCABLE REMAINDER OIL (MBBLS) 23,512
CONTRACTOR ALLOCABLE OIL - 49% (MBBLS) 11,521
TOTAL CONTRACTOR OIL (MBBLS) 20,872
<TABLE>
<CAPTION>
FOREIGN CONTRACTOR CASH FLOW (M$)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COST RECOVERY REVENUES 0 0 0 16,381 45,003 45,457 34,984 9,896
ALLOCABLE REVENUES 0 0 0 4,938 19,632 22,055 18,579 30,919
EXPLORATION EXPENSE (24,000) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - 0 - (80,757 - - -
OPERATING EXPENSE - - - (1,918) (8,241) (9,398) (8,273) (7,387)
------ ----- ----- ----- ------ ------ ----- -----
NET CASH FLOW (24,000) 0 0 (19,401) 24,363 58,114 45,289 33,429
====== ===== ====== ====== ====== ====== ====== ======
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ----- -----
COST RECOVERY REVENUES 7,107 6,522 6,243 5,923 5,621 5,349
ALLOCABLE REVENUES 27,587 23,798 20,930 19,232 18,222 17,243
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (6,871) (6,500) (6,243) (5,923) (5,621) (5,349)
----- ------ ------ ------ ------ ------
NET CASH FLOW 27,823 23,820 20,930 19,232 18,222 17,243
====== ====== ====== ====== ====== ======
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
COST RECOVERY REVENUES 3,883 3,637 4,657 4,528 4,081 -
ALLOCABLE REVENUES 17,551 16,264 13,997 13,214 9,277 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (3,883) (3,637) (4,657) (4,528) (4,081) -
------ ------ ------ ----- ----- ----
NET CASH FLOW 17,551 16,264 13,997 13,214 9,277 -
====== ====== ====== ====== ===== ====
TOTALS
------
COST RECOVERY REVENUES 209,273
ALLOCABLE REVENUES 293,437
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (80,757)
OPERATING EXPENSE (92,510)
------
NET CASH FLOW 329,442
=======
<TABLE>
<CAPTION>
CASH FLOW TO EACH PARTNER (M$) (5.9% INTEREST)
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL OIL REVENUES 0 0 0 1,258 3,813 3,983 3,160 2,408
EXPLORATION EXPENSE (1,416) - - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - 0 - (4,765) - - -
OPERATING EXPENSE - - - (113) (486) (554) (488) (436)
----- ---- ----- ---- ----- ----- ----- -----
NET CASH FLOW (1,416) 0 0 1,145 (1,437) 3,429 2,672 1,972
===== ==== ===== ===== ===== ===== ===== =====
</TABLE>
2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 2,047 1,789 1,603 1,484 1,407 1,333
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (405) (384) (368) (349) (332) (316)
----- ---- ----- ----- ----- -----
NET CASH FLOW 1,642 1,405 1,235 1,135 1,075 1,017
===== ==== ===== ===== ===== =====
2010 2011 2012 2013 2014 2015
---- ---- ---- ---- ---- -----
TOTAL OIL REVENUES 1,265 1,174 1,101 1,047 788 -
EXPLORATION EXPENSE - - - - - -
SUBSEQUENT DEVELOPMENT EXPENSE - - - - - -
OPERATING EXPENSE (229) (215) (275) (267) (241) -
----- ----- ----- ----- --- ----
NET CASH FLOW 1,036 960 826 780 547 -
===== ==== ==== ==== ==== ====
TOTALS
------
TOTAL OIL REVENUES 29,660
EXPLORATION EXPENSE -
SUBSEQUENT DEVELOPMENT EXPENSE (4,765)
OPERATING EXPENSE (5,458)
-----
NET CASH FLOW 19,437
======
NET PRESENT VALUES @ 12% AS OF 1-1-2000, (M$) 8,974 (AMOUNT OF PAYMENT
IN YEAR 2000)
NET PRESENT VALUES @ 10% AS OF 1-1-1998, (M$) 7,416 (DISCOUNTED PAYMENT)
GLOSSARY OF TERMS
The following is a glossary of commonly used terms in the
oil and gas industry which is being provided for ease of
reference and convenience purposes only.
"area of mutual interest" or "AMI" - An agreement by which
parties attempt to describe a geographical area within which
they agree to share certain existing and additional leases
acquired by any of them in the future.
"APO/BPO" - After payout/before payout.
"Btu/MMBtu" - British Thermal Units, a measure of the
heating value of fuel. MMBtu stands for one million Btu.
"Bbls/MBbls" - A Bbl. or barrel is 42 U.S. gallons of crude
oil or condensate measured at 60 degrees Fahrenheit. MBbls
stands for one thousand Bbls.
"carried interest" - A fractional working interest in an oil
and gas lease, the holder of which is carried and has no
liability for a portion or all of the attirubtable
development and operating costs. The person advancing the
costs is the carrying party; the other is the carried party.
"casing point" - The time when the operator recommends that
a completion attempt be made, or when the well is plugged
and abandoned without a completion attempt being made.
"choke/choke size" - A pipe section having an orifice for
restricting and controlling the flow of oil and gas. Choke
size is the orifice diameter and is commonly expressed in
64ths of an inch.
"continuous drilling" - A lease clause providing that
drilling of another well be commenced within a specified
time after completion of the preceding well. As a general
rule, if this is not done, all undeveloped acreage must be
released.
"development" - The drilling of a well within the productive
area of an oil or gas reservoir, as indicated by reasonable
interpretation of available data, with the object of
completing the well in that reservoir.
"exploration" - Operations conducted in search of
undiscovered oil, gas and/or condensate.
"farmout/farmin" - An agreement providing for assignment of
a lease. A typical characteristic of a farmout is the
obligation of the assignee to conduct drilling operations on
the assigned acreage as a pre-requisite to completion of the
assignment. The assignor will usually reserve some type of
interest in the lease. The transaction is characterized as
a farmout to the assignor and farmin to the assignee.
"field" - An area within a lease or leases where production
of oil, gas and/or condensate has been established and which
has been so designated by the appropriate regulatory
authority.
"gathering facilities" - Pipelines and other facilities
used to collect gas from various wells and bring it by
separate and individual lines to a central point where it is
delivered into a single line.
"gathering gas" - The first taking or the first retaining of
possession of gas for transmission through a pipeline, after
the severance of such gas, and after the passage of such gas
through any separator, drip, trap or meter that may be
located at or near the well. In the case of gas containing
gasoline or liquid hydrocarbons that are removed or
extracted in commercial quantities at a plant by scrubbing,
absorption, compression, or any similar process, the term
means the first taking or the first retaining of possession
of such gas for transmission through a pipeline after such
gas has passed through the outlet of such plant. The act of
collecting gas after it has been brought from the earth.
"gathering line" - Pipes used to transport oil or gas from
the lease to the main pipeline in the area. In the case of
oil, the lines run from the lease tanks to a central pump
station at the beginning of the main pipeline. In the case
of gas, the flow is continuous from the well head to the
ultimate consumer, since gas cannot be stored. Gathering
lines collect gas under fluctuating pressures which are then
regulated by regulating stations before the gas is
introduced into trunk or transmission lines.
"gathering system" - The gathering lines, pumps, auxiliary
tanks (in the case of oil), and other equipment used to move
oil or gas from the well site to the main pipeline for
eventual delivery to the refinery or consumer, as the case
may be. In the case of gas, the gathering system includes
the processing plant (if any) in which the gas is prepared
for the market.
"gross/net" - The term "gross" is used when reference is
made, for example, to the total acreage of a lease. The
term "net" is used when reference is made to the working
interest or net revenue interest in a lease of one
particular leaseholder. The same term may be applied to a
leaseholder's interest in reserves and/or production from a
lease.
"held by production" or "HBP" - A provision in a lease to
the effect that such lease will be kept in force as long as
there is production from the lease in paying quantities.
"lease bonus" - A cash payment by the lessee for the
execution of an oil and gas lease by the mineral owner.
"lease" or "leasehold" - An interest for a specified term in
property allowing for the exploration for and production of
oil, gas and/or condensate.
"log" - A record of the formations penetrated by a well,
from which their depth, thickness, rock properties and (if
possible) contents may be obtained.
"Mcf/MMcf/Bcf" - Mcf stands for one thousand cubic feet of
gas, measured at 60 degrees Fahrenheit and at atmospheric
pressure of 14.7 pounds per square inch. MMcf stands for one
million cubic feet of gas. Bcf stands for one million Mcf.
"net revenue interest" or "NRI" - The share of revenues to
which the holder of a working interest is entitled upon
fulfilling the obligations, after deduction of all
royalties, overriding royalties or similar burdens,
attributable to his working interest.
"operator" - The person or company having the operational
management responsibility for the drilling of or production
from any oil, gas and/or condensate well.
"overriding royalty" - A form of royalty, entitling the
holder to receive a percentage of oil, gas and/or condensate
produced from the wells on a specified lease, or the
revenues arising from the sale thereof, free of all expenses
arising therefrom, save for production taxes. Generally, the
rights accruing to working interest holders are subject to
the rights of overriding royalty holders and any rights of
overriding royalty holders terminate upon cancellation or
reversion of the underlying lease.
"pay" - The geological deposit in which oil, gas and/or
condensate is found in commercial quantities.
"payout" - Generally, that point in time, determined by
agreement, when a person has recouped his investment in the
drilling, development, equipping and operating of a well or
wells.
"permeability" - A measure of the resistance offered by rock
to the movement of fluids through it.
"porosity" - The volume of the pore spaces between mineral
grains as compared to the total rock volume. Porosity is a
measure of the capacity of rock to hold oil, gas and water.
"probable reserves" - The estimated quantities of
commercially recoverable hydrocarbons associated with known
accumulations, which are based on engineering and geological
data similar to those used in the estimates of proved
reserves but, for various reasons, these data lack the
certainty required to classify the reserves as proved. In
some cases, economic or regulatory uncertainties may dictate
the probable classification. Probable reserves are less
certain to be recovered than proved reserves.
"prospect" - One lease comprising, or several leases which
together comprise, a geographical area believed to contain
commercial quantities of oil, gas and/or condensate.
"prospective" - A geographical area or structure believed to
contain commercial quantities of oil, gas and/or condensate.
"proved reserves" - Estimated quantities of crude oil,
condensate, natural gas, and natural gas liquids that
geological and engineering data demonstrate with reasonable
certainty to be commercially recoverable in the future from
known reservoirs under existing conditions using established
operating procedures and under current governmental
regulations.
"psig" - Pounds per square inch, gauge.
"rental payment" - A sum of money payable to the lessor by
the lessee for the privilege of deferring the commencement
of drilling operations or the commencement of production
during the primary term of the lease.
"reserves" - The estimated value of oil, gas and/or
condensate which is economically recoverable. Reserves may
be categorized as proved or probable.
"reservoir" - A porous, permeable, sedimentary rock
containing commercial quantities of oil, gas and/or
condensate.
"salt dome" - A mass or plug of salt which has pushed or
domed up sedimentary beds around it; this type structure is
favorable to oil and gas accumulation.
"sand" - A sedimentary rock consisting mostly of sand
grains.
"shut-in royalty" - A payment made when a gas well, capable
of producing in paying quantities, is shut-in for lack of a
market for the gas.
"structure" - A configuration of subsurface rock formations
considered, on the basis of geological or geographical
interpretation, to be capable of containing a reservoir.
"target depth" - The primary geological formation or depth
identified in an agreement applicable to the relevant well
or wells.
"test well" - An exploratory well.
"tight formation" - A zone of relatively low permeability
and thus low well productivity. Wells in such zones usually
require fracturing or other stimulation. Typically, the
productive capacity of a new well completed in a tight zone
declines rapidly for several months or longer after
completion.
"working interest" or "WI" - An interest in a lease carrying
the obligation to bear a proportion of drilling and
operating costs and the right to receive a proportion of the
production or gross revenues attributable thereto.
"workover" - Remedial operations on a well with the
intention of restoring or increasing production.
