<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COSTILLA ENERGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2658940
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
MICHAEL J. GRELLA, PRESIDENT
COSTILLA ENERGY, INC.
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Richard T. McMillan R. Joel Swanson
Cotton, Bledsoe, Tighe & Dawson, Baker & Botts, L.L.P.
a Professional Corporation 910 Louisiana
500 West Illinois Houston, Texas 77002
Suite 300
Midland, Texas 79701
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Senior Subordinated Notes
due 2006 $100,000,000 $1,000 $100,000,000 $34,483
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover of Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges Prospectus Summary; Risk Factors; The Company; Pro
Forma Condensed Financial Statements; Selected
Financial Information
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. *
7. Selling Security Holders............................. *
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page; Prospectus Summary;
Description of Notes
10. Interests of Named Experts and Counsel............... *
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Company;
Capitalization; Pro Forma Condensed Financial
Statements; Selected Financial Information;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business and
Properties; Management; Certain Transactions;
Security Ownership of Certain Beneficial Owners and
Management; Executive Compensation and Other
Information; Description of Notes; Description of
Other Indebtedness; Consolidated Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
* Omitted because item is not applicable.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 26, 1996
PRELIMINARY PROSPECTUS
$100,000,000
COSTILLA ENERGY, INC.
% SENIOR SUBORDINATED NOTES DUE 2006
------------------
The % Senior Subordinated Notes due 2006 (the "Notes") are being offered
(the "Notes Offering") by Costilla Energy, Inc., a Delaware corporation
("Costilla" or the "Company"). The net proceeds of the Notes Offering, together
with the net proceeds of the other financing described herein, will be used by
the Company to refinance existing indebtedness, to pay certain costs in
connection with the Corporate Reorganization (as defined herein) and for general
corporate purposes.
The Notes mature on , 2006, unless previously redeemed. Interest on
the Notes is payable semiannually on , and , commencing
, 1997. The Notes will be redeemable at the option of the Company, in
whole or in part, on or after , 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the redemption date.
Notwithstanding the foregoing, at any time on or before , 1999, Costilla
may redeem up to 30% of the original aggregate principal amount of the Notes
with the net proceeds of an Equity Offering (as defined herein) at a redemption
price equal to % of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the redemption date. Upon a Change of Control (as
defined herein), the Company will be required to make an offer to repurchase all
outstanding Notes at 101% of the aggregate principal amount thereof plus accrued
and unpaid interest, if any, to the date of repurchase. See "Description of
Notes."
Concurrently with the Notes Offering the Company is offering 4,000,000
shares (4,600,000 shares if the underwriters' over-allotment option is exercised
in full) of its Common Stock (the "Common Stock Offering" and together with the
Notes Offering, the "Offerings") pursuant to an underwritten public offering.
The Notes Offering and the Common Stock Offering are each conditioned on the
consummation of the other.
The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company, which will include borrowings under the Credit Facility
(as defined herein). As of March 31, 1996, on a pro forma basis after giving
effect to a recent acquisition, the Corporate Reorganization, the Offerings and
the application of the proceeds therefrom, as described under "Use of Proceeds",
the Company would have had no Senior Indebtedness. No indebtedness of the
Company is expressly subordinated to the Notes. The Notes will be
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis by the Company's material subsidiaries (the "Subsidiary Guarantors"),
provided that such guarantees will terminate under certain circumstances. See
"Risk Factors," "Capitalization" and "Description of Notes."
The Notes will be represented by a Global Certificate registered in the name
of the nominee of The Depository Trust Company, which will act as the Depositary
(the "Depositary"). Beneficial interests in the Global Certificate will be shown
on, and transfer thereof will be effected only through, records maintained by
the Depositary and its participants. Except as described herein, Notes in
definitive form will not be issued. See "Description of Notes--Book-Entry,
Delivery and Form."
The Company does not intend to list the Notes on any national securities
exchange. See "Risk Factors--Absence of Public Market." Application will be made
to list the Common Stock on The Nasdaq Stock Market's National Market ("Nasdaq
National Market") under the symbol "COSE".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNTS (2) COMPANY (1)(3)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Note........................................... % % %
Total.............................................. $100,000,000 $ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company and the Subsidiary Guarantors have agreed to indemnify the
Underwriters (as defined herein) against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $ .
The Notes are being offered, subject to prior sale, by the Underwriters
when, as and if issued to and accepted by the Underwriters, and subject to
various prior conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Global Certificate will be made on or about ,
1996 in book-entry form through the facilities of the Depositary, against
payment therefor.
NATIONSBANC CAPITAL MARKETS, INC. PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1996
<PAGE>
COSTILLA ENERGY, INC.
GEOGRAPHIC FOCUS
[GRAPHICS, AND FOR EDGAR A DESCRIPTION OF THE GRAPHICS, TO FOLLOW]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET OR OTHERWISE. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, FINANCIAL STATEMENTS AND OTHER DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE PRO FORMA INFORMATION GIVES EFFECT TO THE CONVERSION OF COSTILLA
FROM A LIMITED LIABILITY COMPANY TO A CORPORATION, CERTAIN MATERIAL ACQUISITIONS
AND THE OFFERINGS AND THE APPLICATION OF THE ESTIMATED NET PROCEEDS THEREFROM.
SEE "-- SIGNIFICANT ACQUISITIONS," "THE COMPANY -- CORPORATE REORGANIZATION,"
AND "USE OF PROCEEDS." AS USED HEREIN, REFERENCES TO THE COMPANY OR TO COSTILLA
ARE TO COSTILLA ENERGY, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WITH RESPECT TO THE COMMON STOCK OFFERING WILL NOT BE EXERCISED. CERTAIN
OIL AND GAS TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY" INCLUDED
HEREIN. CERTAIN TERMS USED IN CONNECTION WITH THE NOTES ARE DEFINED UNDER
"DESCRIPTION OF NOTES -- CERTAIN DEFINITIONS."
THE COMPANY
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin, the Gulf Coast and the Rocky Mountain
regions. The Company's strategy focuses on increasing reserves through a
targeted exploration program, the exploitation of its existing properties and
selective property acquisitions. In addition, the Company recently acquired an
interest in a concession for the development of mineral interests in the
Republic of Moldova, in Eastern Europe. The Company also has minor interests in
the domestic gas gathering and transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of March 31, 1996, the Company had total
estimated net proved reserves of 16.5 Mmbbls of oil and 112.9 Bcf of gas,
aggregating 35.3 MMBOE, with a PV-10 Value of approximately $179.5 million,
assuming the 1996 Acquisition (as defined below) had occurred at March 31, 1996.
The Company also has a substantial undeveloped acreage position consisting of
205,908 gross (141,384 net) acres. The Company has identified in excess of 200
drilling locations of which 82 are included in its proved reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 23 wells based on these
3-D surveys, 20 of which have been productive. The Company has recently
completed a third 3-D survey in Pecos County, Texas and intends to commence
drilling on this acreage in the second half of 1996. Moreover, the Company is
currently conducting two additional 3-D surveys. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and EBITDA. The Company increased its estimated proved reserves from
6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at March 31, 1996 (pro forma for
the 1996 Acquisition), representing a compound annual growth rate of 114%. This
reserve growth has been achieved at an average all-in finding cost of $3.49 per
BOE over such period, a level which the Company believes is lower than industry
averages. Concurrently, the Company increased its average net daily production
from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for the three
months ended March 31, 1996 (pro forma for the 1996 Acquisition), representing a
compound annual growth rate of 195%. EBITDA increased at a 240% compound annual
growth rate from $1.8 million for 1993 to $20.8 million for 1995 (pro forma for
the 1995 Acquisition and the 1996 Acquisition).
3
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a diverse portfolio of
properties. The Company also seeks to manage the elements of its business
strategy through the operation of a significant portion of its properties, the
use of a disciplined rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- - EXPLORATION EFFORTS. The Company uses extensive geological and
geophysical analysis to carefully focus its 3-D seismic surveys. This
focus allows the Company to successfully direct the size and scope of its
exploration program in order to improve the likelihood of success while
managing overall exploration costs. The Company's exploration efforts are
concentrated currently on known producing regions. The Company plans to
drill 26 exploratory wells during the remainder of 1996 and 36 exploratory
wells in 1997. Capital budgeted for exploration activities is $8.4 million
for the last nine months of 1996 and $10.8 million for 1997.
- - EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers, infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.9 million
for the last nine months of 1996 and $9.2 million for 1997, which includes
the drilling of 17 development wells in 1996 and 13 development wells in
1997.
- - PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying
and developing previously unproved reserves on acquired acreage. The
Company seeks to acquire reserves which will fit its existing portfolio,
are generally not being actively marketed and where a negotiated sale
would be the method of purchase. The Company does not rely on major oil
company divestitures or property auctions.
- - PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities
in distinct regions it is able to reduce commodity price and other
operational risks. The Company's Moldovan interest is an extension of this
strategy and can be characterized by low initial costs, significant
reserve potential and the availability of technical data that may be
further developed by the Company.
- - CONTROL OF OPERATIONS. The Company prefers to operate and own the
majority working interest in its properties. This allows the Company
greater control over future development, drilling, completing and lifting
costs and marketing of production. At December 31, 1995, the Company
operated wells constituting approximately 65% of its total PV-10 Value
(pro forma for the 1996 Acquisition).
4
<PAGE>
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 6.9 Mmbbls of oil and 40.0 Bcf of gas, aggregating
13.6 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At March 31, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at March 31, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 42,855 gross
(10,172 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
DRILLING ACTIVITIES
Exploration efforts since January 1, 1996 include the drilling of two
successful wells located on the Company's Edwards/McElroy Ranch 3-D Prospect in
the Permian Basin. Production from the initial well averaged 344 BOE per day
from its May 11 completion to June 30, 1996, while the second well is currently
being completed. These successful wells confirm the Company's seismic
interpretation of the continuation of a significant trend. As a result, the
Company has identified 75 additional drilling locations, three of which are
included in the Company's proved reserves. Through June 30, 1996, the Company
had drilled 11 total wells in the prospect, 10 of which have been completed as
producing wells.
The Company has also drilled three exploratory wells in the McGyver-Green
Acres 3-D Prospect since January 1, 1996, yielding two successful completions
and bringing the total number of wells drilled in that prospect to 12. The
average daily production from the 11 producing wells in this prospect is
approximately 83 BOE per well. The Company has identified 41 additional drilling
locations in the McGyver-Green Acres Prospect, 14 of which are included in the
Company's proved reserves.
The Company has also drilled and completed five development wells in the
Permian Basin and Gulf Coast regions since the beginning of 1996. Currently, the
Company's principal exploitation activities include a carbon dioxide flood in
the East Goldsmith Unit, infill drilling primarily in the Permian Basin and
horizontal drilling in the Susan Peak Field.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.......................... $100,000,000 aggregate principal amount of
% Senior Subordinated Notes due 2006
of the Company (the "Notes").
Maturity Date............................... , 2006.
Interest Payment Dates...................... and , commencing , 1997.
Optional Redemption......................... On or after , 2001, the Company may
redeem the Notes, in whole or in part, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
date of redemption. Notwithstanding the
foregoing, at any time on or before ,
1999, the Company may redeem up to 30% of the
original aggregate principal amount of the
Notes with the net proceeds of an Equity
Offering (as defined herein) at a redemption
price equal to % of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of redemption, provided that
at least 70% of the original aggregate
principal amount of the Notes remain
outstanding immediately after such redemption.
See "Description of Notes -- Optional
Redemption."
Mandatory Redemption........................ None, except at maturity on , 2006.
Ranking..................................... The Notes will be general unsecured
obligations of the Company, subordinated in
right of payment to all existing and future
Senior Indebtedness of the Company, which will
include borrowings under the Credit Facility.
At March 31, 1996, on a pro forma basis after
giving effect to the 1996 Acquisition, the
Corporate Reorganization, the Offerings and
the application of the net proceeds therefrom,
the Company would have had no outstanding
Senior Indebtedness. See "Description of Notes
-- Subordination" and "-- Subsidiary
Guarantees."
Guarantees.................................. The Notes will be unconditionally guaranteed
on a senior subordinated basis by the existing
and future Subsidiary Guarantors under the
Subsidiary Guarantees (all as defined herein).
The Subsidiary Guarantees will be subordinated
in right of payment to all existing and future
Senior Indebtedness of the Subsidiary
Guarantors. Each of the Subsidiary Guarantees
will be a guarantee of payment and not of
collection. See "Description of Notes --
Subsidiary Guarantees."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Change of Control........................... Upon a Change of Control (as defined herein),
the Company will be required to make an offer
to repurchase all outstanding Notes at 101% of
the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date
of repurchase. See "Description of Notes --
Repurchase at the Option of Holders -- Change
of Control."
Covenants................................... The Indenture pursuant to which the Notes will
be issued (the "Indenture") will restrict,
among other things, the Company's ability to
incur additional indebtedness, pay dividends
or make certain other restricted payments,
incur liens to secure PARI PASSU or
subordinated indebtedness, engage in any sale
and leaseback transaction, sell stock of
subsidiaries, apply net proceeds from certain
asset sales, merge or consolidate with any
other person, sell, assign, transfer, lease,
convey or otherwise dispose of substantially
all of the assets of the Company, enter into
certain transactions with affiliates, or incur
indebtedness that is subordinate in right of
payment to any Senior Indebtedness and senior
in right of payment to the Notes.
Common Stock Offering....................... Concurrently with the Notes Offering, the
Company is offering 4,000,000 shares of Common
Stock to the public. See "Common Stock
Offering." The closings of the Notes Offering
and the Common Stock Offering are each
conditioned upon the consummation of the
other.
Use of Proceeds............................. The Company intends to use the net proceeds of
the Notes Offering, together with the net
proceeds of the Common Stock Offering (i) to
repay existing indebtedness, (ii) to pay
certain costs incurred in connection with the
Corporate Reorganization (as defined herein),
including redeeming certain membership
interests of the Company's predecessor and
(iii) for general corporate purposes. See "Use
of Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary historical and pro forma
financial data of the Company. The historical data should be read in conjunction
with the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus. The Company acquired significant producing oil and
gas properties in certain of the periods presented which affect the
comparability of the historical financial and operating data for the periods
presented. The pro forma information should be read in conjunction with the Pro
Forma Condensed Financial Statements and notes thereto included elsewhere in
this Prospectus. Neither the historical results nor the pro forma results are
necessarily indicative of the Company's future operations or financial results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------- --------- -------------------- ---------
1993 1994 1995 1995(1) 1995 1996 1996(1)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 4,397 $ 7,836 $ 21,816 $ 52,637 $ 2,180 $ 8,951 $ 14,038
Expenses:
Oil and gas production............... 1,688 2,351 10,355 26,937 896 3,659 6,283
General and administrative........... 952 1,184 3,571 4,850 459 1,362 1,505
Exploration and abandonment.......... 218 793 1,650 2,761 1,007 228 475
Depreciation, depletion and
amortization........................ 884 1,847 6,095 14,313 462 1,986 3,166
Interest............................. 605 1,458 4,454 11,631 407 1,704 2,908
Other................................ -- -- 2 2 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before income
taxes................................. 50 203 (4,311) (7,857) (1,051) 12 (299)
Pro forma earnings (loss) per common
share................................. -- -- -- (0.80) -- -- (0.03)
Pro forma weighted average common
shares outstanding.................... -- -- -- 9,861 -- -- 10,000
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities................. $ 322 $ 1,527 $ 6,366 -- $ (1,827) $ 2,276 --
Investing activities................. (6,731) (12,146) (62,467) -- (1,389) (5,132) --
Financing activities................. 6,315 10,618 58,830 -- 3,272 3,000 --
OTHER FINANCIAL DATA:
Capital expenditures................... $ 6,862 $ 11,868 $ 62,220 -- $ 1,389 $ 5,132 --
EBITDA (2)............................. 1,757 4,301 7,888 $ 20,848 825 3,930 $ 6,250
EBITDA/Interest expense (3)............ 2.9x 2.9x 1.8x 1.8x 2.0x 2.3x 2.1x
Ratio of earnings to fixed charges
(4)................................... 1.0 1.1 -- -- -- 1.0 --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital........................ $ 1,612 $ 1,081 $ 2,496 -- -- $ 2,104 $ 15,955
Total assets........................... 13,365 24,904 87,367 -- -- 91,024 145,117
Total debt............................. 12,006 23,591 71,494 -- -- 74,494 100,000
Redeemable members' capital............ -- -- 11,320 -- -- 11,678 --
Members' capital....................... 51 (747) (7,189) -- -- (7,535) --
Pro forma stockholders' equity......... -- -- -- -- -- -- 35,843
ACNTA (5).............................. 201,470
Ratio of ACNTA to total debt........... -- -- -- -- -- -- 2.0x
</TABLE>
- ------------------------------
(1) Assumes that the 1995 Acquisition, the 1996 Acquisition, the Corporate
Reorganization (as defined in "The Company-- Corporate Reorganization") and
the Offerings and the application of proceeds therefrom had taken place on
March 31, 1996 for purposes of the Balance Sheet Data (to the extent not
already reflected) and as of January 1, 1995 for purposes of Statement of
Operations Data and Other Financial Data.
(2) EBITDA is presented because of its wide acceptance as a financial indicator
as to a company's ability to service or incur debt. EBITDA (as used herein)
is calculated by adding interest, income taxes, depreciation, depletion and
amortization and exploration and abandonment costs to net income (loss).
EBITDA should not be considered as an alternative to earnings (loss) as an
indicator of the Company's financial performance or to cash flow as a
measure of liquidity.
8
<PAGE>
(3) Calculated by dividing EBITDA by interest. Interest includes interest
expense accrued and amortization of deferred financing costs.
(4) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) plus income taxes and fixed charges. Fixed
charges are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of operating lease expense which is
deemed to be representative of an interest factor. Earnings were
insufficient to cover fixed charges by $4,311,000, and $1,051,000 for the
historical periods ended December 31, 1995 and March 31, 1995, respectively
and $7,857,000 and $299,000 for the pro forma periods ended December 31,
1995 and March 31, 1996, respectively.
(5) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of Notes-- Certain Definitions."
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1996
------------------------------- ------------------------
1993 1994 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES (2):
Oil (MBbls)............................................ 2,365 4,009 10,788 11,479 16,476
Gas (Mmcf)............................................. 21,619 27,512 78,152 79,420 112,920
MBOE................................................... 5,968 8,594 23,813 24,716 35,297
Percent of proved developed reserves................... 67.0% 62.3% 76.1% 73.9% 78.2%
Present value of estimated future net cash flow, before
income taxes, discounted at 10% (in thousands)........ $ 26,377 $ 36,779 $ 113,296 $ 129,091 $ 179,527
Reserve life index (in years) (3)...................... 19.7 14.4 13.6 -- --
RESERVE REPLACEMENT DATA:
Production replacement ratio (4)....................... 513% 549% 969% -- --
All-in finding costs per BOE (5)....................... $ 4.31 $ 3.67 $ 3.53 $ 2.84 $ 2.84
</TABLE>
- ------------------------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if such
transactions had occurred as of January 1, 1995.
(2) Estimates of net proved oil and gas reserves at March 31, 1996 are based on
reports prepared by Williamson Petroleum Consultants, Inc. ("Williamson"),
independent petroleum engineers. The 1995 reserve estimates were prepared by
the Company and such estimates of gross reserves with respect to certain of
the Company's producing properties were subject to a limited review by
Williamson. Prior reserve estimates are based on information compiled by the
Company. See "Risk Factors -- Uncertainty of Estimates of Proved Reserves
and Future Net Revenues" and "Business and Properties -- Oil and Gas
Reserves."
(3) Calculated by dividing year-end proved reserves by annual production for the
most recent year.
(4) Calculated by dividing reserve additions through acquisitions of reserves,
extensions and discoveries and revisions during the year by production for
such year.
(5) The average all-in finding costs over the period January 1, 1993 through
March 31, 1996 (pro forma for the 1996 Acquisition) was $3.49 per BOE.
9
<PAGE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
THREE MONTHS ENDED MARCH
HISTORICAL PRO FORMA(1) 31, 1996
------------------------------- ------------- --------------------------
1993 1994 1995 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)................................... 158 330 950 2,085 338 502
Gas (Mmcf).................................... 865 1,600 4,806 11,985 1,643 2,832
MBOE.......................................... 302 597 1,751 4,083 612 974
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl)................................. $ 16.93 $ 15.25 $ 15.53 $ 15.75 $ 17.32 $ 17.37
Gas (per Mcf)................................. 1.82 1.63 1.45 1.59 1.81 1.88
COSTS PER BOE:
Production costs, including severance taxes
(2).......................................... $ 5.59 $ 3.94 $ 5.91 $ 6.60 $ 5.98 $ 6.45
Depreciation, depletion and amortization...... 2.93 3.09 3.48 3.51 3.25 3.25
</TABLE>
- ------------------------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if such
transactions had occurred as of January 1, 1995.
(2) Production costs per BOE in 1995 and for the three months ended March 31,
1996 were unusually high as a result of relatively high workover expenses
with respect to properties acquired in the 1995 Acquisition which did not
produce related production improvements until subsequent periods. In
addition, the Company expended approximately $1.6 million during 1995 in one
field in the Permian Basin primarily for plugging wells to comply with
applicable regulatory requirements.
10
<PAGE>
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD
CONSIDER FULLY, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, THE FOLLOWING FACTORS.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
As of March 31, 1996, as adjusted for the 1996 Acquisition, the Corporate
Reorganization, the Offerings and the application of the net proceeds therefrom,
the Company's total debt and stockholders' equity would have been $100.0 million
and $35.8 million, respectively. See "Capitalization." In addition, the Company
may currently incur additional indebtedness under its Credit Facility (as
defined under "Description of Other Indebtedness"). Immediately following the
consummation of the Offerings, the Company anticipates that the Credit Facility
will afford it $50.0 million of available borrowing capacity, none of which is
expected to be outstanding on such date.
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Credit Facility and the Indenture governing the Notes will
require the Company to meet certain financial tests, and other restrictions may
limit its ability to borrow additional funds or to dispose of assets and may
affect the Company's flexibility in planning for, and reacting to, changes in
its business, including possible acquisition activities and (iii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired. The Company's ability to meet its debt service obligations and
to reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. Based upon the current and anticipated
level of operations, the Company believes that its cash flow from operations,
together with amounts available under its Credit Facility and its other sources
of liquidity, will be adequate to meet its anticipated requirements in the
foreseeable future for working capital, capital expenditures, interest payments
and scheduled principal payments. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required to refinance
all or a portion of its existing debt, including the Notes, or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained.
SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES
The Notes and Subsidiary Guarantees will be subordinated in right of payment
to all existing and future Senior Indebtedness of the Company, including all
indebtedness under the Credit Facility. As of March 31, 1996, after giving pro
forma effect to the 1996 Acquisition, the Corporate Reoganization, the Offerings
and the application of the net proceeds therefrom, the Company would have had no
Senior Indebtedness outstanding and anticipates that it will have up to $50.0
million available under the Credit Facility, which, if borrowed, would be
included as Senior Indebtedness. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Indebtedness of the Company
has been paid in full, and there may not be sufficient funds remaining to pay
amounts due on any or all of the Notes outstanding. See "Description of Notes --
Subordination."
SUBSIDIARY GUARANTEES MAY TERMINATE; FRAUDULENT CONVEYANCE CONSIDERATIONS
RELATING TO SUBSIDIARY GUARANTEES
The Company's obligations under the Notes will be guaranteed on a senior
subordinated basis by its subsidiaries, except for subsidiaries through which
its Moldovan operations are conducted. Various fraudulent conveyance laws have
been enacted for the protection of creditors and may be used by a court of
competent jurisdiction to subordinate or avoid any Subsidiary Guarantee. To the
extent that a court were to find that (x) a Subsidiary Guarantee was incurred
with the intent to hinder, delay or
11
<PAGE>
defraud any present or future creditor or that such Subsidiary Guarantor
contemplated insolvency with a design to favor one or more creditors to the
exclusion in whole or in part of others or (y) a Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for issuing its
Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee, such
Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the
issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage in a
business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, a court could avoid or subordinate the Subsidiary Guarantee in favor of
such Subsidiary Guarantor's other creditors. Among other things, a legal
challenge of the Subsidiary Guarantee issued by such Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
such Subsidiary Guarantor as a result of the issuance by the Company of the
Notes. To the extent the Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason, the holders of the Notes
would cease to have any claim against such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantors whose Subsidiary
Guarantees were not avoided or held unenforceable. In such event, the claims of
the holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject to the prior payment of all liabilities of such Subsidiary
Guarantor. There can be no assurance that, after providing for all prior claims,
there would be sufficient assets to satisfy the claims of the holders of the
Notes relating to any avoided portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair market value of all
of its assets at a fair valuation, if the present fair market value of its
assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature, or if it had insufficient capital to carry on its
business.
On the basis of historical financial information, recent operating history
as discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information currently available to it, the
Company believes that the Notes and the Subsidiary Guarantees issued
concurrently with the issuance of the Notes are being incurred for proper
purposes and in good faith and that, after giving effect to indebtedness
incurred in connection with the issuance of the Notes and the Subsidiary
Guarantees, the Company and the Subsidiary Guarantors would be solvent, would
have sufficient capital for carrying on their respective businesses and would be
able to pay their debts as such debts become absolute and mature. There can be
no assurance, however, that a court passing on such issues would reach the same
conclusions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
The Indenture governing the Notes provides that upon the occurrence of a
Change of Control, the Company is required to offer to repurchase any or all of
the outstanding Notes at a price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. Generally, a "Change of Control" includes any person or group other
than Cadell S. Liedtke, Michael J. Grella and Henry G. Musselman, the Chairman
of the Board, President and Executive Vice President of the Company,
respectively, acquiring 50% or more of the voting securities of the Company, and
certain other events. If a Change of Control occurs, there is no assurance that
the Company will have available funds sufficient to pay for the Notes tendered
for repurchase. See "Description of Notes -- Repurchase at the Option of Holders
- -- Change of Control."
If an offer to repurchase is required to be made and the Company does not
have available funds sufficient to pay for Notes tendered for repurchase, an
event of default would occur under the Indenture.
12
<PAGE>
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH FLOWS
There are numerous uncertainties in estimating quantities of proved reserves
and in projecting future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth in this Prospectus are estimates only. Reserve estimates
are imprecise and should be expected to change as additional information becomes
available. Furthermore, estimates of oil and gas reserves, of necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be exactly measured, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
Moreover, there can be no assurance that the reserves set forth herein will
ultimately be produced or that the proved undeveloped reserves will be developed
within the periods anticipated. Variances from the estimates contained herein
could be material. In addition, the estimates of future net revenues from proved
reserves of the Company and the present value thereof are based upon certain
assumptions about production levels, prices and costs, which may not be correct.
The Company emphasizes with respect to such estimates that the discounted future
net cash flows should not be construed as representative of the fair market
value of the proved oil and gas properties belonging to the Company, because
discounted future net cash flows are based upon projected cash flows that do not
provide for changes in oil and gas prices or for escalation of expenses and
capital costs. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based. Actual results may
differ materially from the results estimated. Prospective purchasers of Notes
are cautioned not to place undue reliance on the reserve data included in this
Prospectus.
ACQUISITION RISKS
The Company's rapid growth in recent years has been largely the result of
acquisitions of producing properties. The Company expects to continue to
evaluate and pursue acquisition opportunities available on terms management
considers favorable to the Company. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future oil and gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond the Company's control. Such an assessment is necessarily inexact
and its accuracy is inherently uncertain. In connection with such an assessment,
the Company performs a review of the subject properties it believes to be
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties fully to assess their deficiencies and
capabilities. Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. The Company is generally not entitled to contractual indemnification
for preclosing liabilities, including environmental liabilities, and generally
acquires interests in the properties on an "as is" basis.
VOLATILITY OF OIL AND GAS PRICES
The Company's financial results and, therefore, its ability to service its
debt, including the Notes, are significantly affected by the price received for
the Company's oil and gas production. Historically, the markets for oil and gas
have been volatile and may continue to be volatile in the future. Prices of oil
and gas are subject to wide fluctuations in response to market uncertainty,
changes in supply and demand and a variety of additional factors, all of which
are beyond the control of the Company. These factors include domestic and
foreign political conditions, the overall level of supply of and demand for oil
and gas, the price of imported oil and gas, weather conditions, the price and
availability of alternative fuels and overall economic conditions. The Company's
future financial condition and
13
<PAGE>
results of operations will be dependent, in part, upon the prices received for
the Company's oil and gas production, as well as the costs of acquiring,
finding, developing and producing reserves. To reduce its exposure to price
risks in the sale of its oil and gas, the Company enters into hedging
arrangements from time to time. Although the Company hedges a significant
portion of its production, any substantial or extended decline in the price of
oil and gas would have a material adverse effect on the Company's financial
condition and results of operations, as well as reduce the amount of the
Company's oil and gas that could be produced economically. Moreover, if oil and
gas prices fall materially below their current levels, the availability of funds
and the Company's ability to repay outstanding amounts under its Credit Facility
and the Notes could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONFLICTS OF INTEREST
The Company has a continuing relationship with A&P Meter Sales and Services,
Inc. ("A&P"), a corporation in which Messrs. Liedtke, Grella and Musselman own
60.0% of the outstanding common stock. A&P owes the Company $437,000 (including
accrued interest through December 31, 1995) pursuant to a promissory note under
which the Company is not entitled to any principal or interest payments until
December 31, 2004. Currently, A&P also owes the Company $247,000, which is
represented by a promissory note payable upon demand. See "Certain
Transactions."
Under the Company's current credit arrangements, Messrs. Liedtke, Grella and
Musselman are each liable for a portion of the Company's existing debt (see
"Description of Other Indebtedness") pursuant to limited guaranties. However,
these individuals will not be liable for, or guarantee amounts due under, the
Credit Facility or the indebtedness represented by the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of Messrs. Liedtke,
Grella and Musselman. The loss of the services of any of Messrs. Liedtke, Grella
or Musselman could have a material adverse effect on the Company's operations.
Pursuant to employment agreements which are to be effective upon the
consummation of the Offerings, Messrs. Liedtke, Grella and Musselman have agreed
not to compete with the Company for a one-year period should they voluntarily
leave the Company's employment or should their employment be terminated for
cause. The Company believes that its success is also dependent upon its ability
to continue to employ and retain skilled technical personnel. See "Management."
CONTROL OF THE COMPANY
If the Offerings are completed, Messrs. Liedtke, Grella and Musselman will
own directly and indirectly, in the aggregate, 49.2% of the outstanding Common
Stock (or 46.4% if the underwriters' over-allotment option in the Common Stock
Offering is exercised in full). Accordingly, Messrs. Liedtke, Grella and
Musselman may be able to exercise significant influence over the election of
directors of the Company and the control of the Company's management, operations
and affairs. See "Security Ownership of Certain Beneficial Owners and
Management."
FOREIGN INVESTMENT
The Company's investment in Moldova involves risks typically associated with
investments in emerging markets such as foreign exchange restrictions and
currency fluctuations, foreign taxation, changing political conditions, foreign
and domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances and other risks that may limit or disrupt markets. In addition, if
a dispute arises in its Moldovan operations, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons to the jurisdiction of the United States. The Company attempts
to conduct its business and financial affairs so as to protect against political
and economic risks applicable to operations in Moldova, but there can be no
assurance the Company will be successful in so protecting itself.
14
<PAGE>
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or gas will be encountered. The cost of drilling, completing and
operating wells is often uncertain, and drilling operations may be curtailed,
delayed or cancelled as a result of a variety of factors, including unexpected
drilling conditions, pressure or irregularities in formations, equipment
failures or accidents, adverse weather conditions and shortages or delays in the
delivery of equipment. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on the Company's future results of operations and financial condition.
OPERATING HAZARD AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in the
drilling for and production and transportation of oil and gas, including fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury or loss of life,
severe damage to and destruction of properties of the Company and others, and
suspension of operations. Although the Company maintains insurance coverage that
it considers to be adequate and customary in the industry, it is not fully
insured against certain of these risks, either because such insurance is not
available or because of high premium costs. The occurrence of a significant
event not fully covered by insurance could have a material adverse effect on the
Company's financial condition and results of operations.
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and gas and securing trained personnel. Many competitors have
substantially larger financial resources, staffs and facilities. See "Business
and Properties -- Competition and Markets."
GOVERNMENT LAWS AND REGULATIONS
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations. In
particular, oil and gas production, operations and economics are or have been
significantly affected by price controls, taxes and other laws relating to the
oil and gas industry, by changes in such laws and by changes in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business, financial condition or results of operations. See "Business and
Properties -- Regulation."
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The Company believes that compliance with such laws
has had no material adverse effect upon the Company's operations to date and
that the cost of such compliance has not been material. Nevertheless, the
discharge of oil, gas or other pollutants into the air, soil or water may give
rise to significant liabilities on the part of the Company to the government and
third parties and may require the Company to incur substantial costs of
remediation. Moreover, the Company has agreed to indemnify sellers of producing
properties from whom the Company has acquired reserves against certain
liabilities for environmental claims associated with the properties being
purchased by the Company, including, without limitation, in connection with both
the 1995 Acquisition and the 1996 Acquisition. No assurance can be given that
existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will not materially
adversely affect the Company's results of operations and financial condition or
that material indemnity claims will not arise against the Company with respect
to properties acquired by the Company. See "Business and Properties --
Environmental Matters."
15
<PAGE>
ABSENCE OF PUBLIC MARKET
There is no existing public market for the Notes and the Company does not
intend to list the Notes on any national securities exchange. Although the
Underwriters have advised the Company that they currently intend to make a
market in the Notes, the Underwriters are not obligated to do so and may
discontinue such market-making at any time. Accordingly, there can be no
assurance that an active market will develop upon completion of this Notes
Offering or, if developed, that such market will be sustained. The initial
offering price of the Notes will be determined through negotiations between the
Company and the Underwriters, and may bear no relationship to the market price
of the Notes after the Notes Offering. Factors such as quarterly or cyclical
variations in the Company's financial condition and results of operations,
variations in interest rates, future announcements concerning the Company or its
competitors, government regulation, general economic and other conditions and
developments affecting the oil and gas industry could cause the market price of
the Notes to fluctuate substantially.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Certain of these factors are discussed in more
detail elsewhere in this Prospectus, including without limitation under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business and Properties".
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
16
<PAGE>
THE COMPANY
GENERAL
The Company is an independent energy company that is engaged in the
acquisition, exploration, exploitation and development of oil and gas
properties. The Company's primary operations are in the Permian Basin, the Gulf
Coast and the Rocky Mountain regions. The Company recently acquired an interest
in a concession for the development of mineral interests in the Republic of
Moldova, in Eastern Europe. The Company also has minor interests in the domestic
gas gathering and transmission business.
CORPORATE REORGANIZATION
Costilla was incorporated in Delaware in June 1996 to consolidate and
continue the activities previously conducted by Costilla Energy, L.L.C., a Texas
limited liability company (the "LLC"), and its wholly owned subsidiaries, to
acquire the assets of CSL Management Corporation ("CSL") (which owns certain
office equipment used by the Company), and to acquire the stock of Valley
Gathering Company ("Valley"). Both CSL and Valley are owned by Messrs. Liedtke,
Grella and Musselman. See "Certain Transactions."
Contemporaneously with the closings of the Offerings: (1) the redeemable
membership interests of NationsBanc Capital Corp. ("NBCC") in the LLC will be
redeemed for $15.4 million; (2) the LLC will be merged into Costilla (the
"Merger") and an aggregate of 6,000,000 shares of Common Stock will be issued to
the four members of the LLC; (3) Costilla will acquire all of the issued and
outstanding stock of Valley and the assets of CSL for $0.7 million; and (4) $4.3
million in distributions will be made to the members of the LLC, $3.5 million of
which, in the case of Messrs. Liedtke, Grella and Musselman, will be provided to
such persons for certain estimated income tax effects of the Merger. These
transactions are referred to throughout this Prospectus as the "Corporate
Reorganization." As a result of the Corporate Reorganization, Costilla will have
four wholly owned subsidiaries: (i) Costilla Petroleum Corporation, a Texas
corporation ("CPC"), which operates properties owned by Costilla and owns minor
interests in the same properties; (ii) Statewide Minerals Corporation, a Texas
corporation ("Statewide"), which is engaged in the purchase of small royalty and
mineral interests; (iii) Valley, which owns several small gas gathering systems,
a small gas processing plant, certain salt water disposal systems and gas
compressors; and (iv) Costilla Pipeline Company, a Texas corporation
("Pipeline") which owns a gas pipeline in Pennsylvania held for resale. CSL will
be dissolved. Costilla and CPC are the sole members of two Texas limited
liability companies through which the Company's Moldovan operations are
conducted. Costilla also owns a 45.0% interest in a Texas limited liability
company which owns and operates a gas pipeline and associated facilities in
Louisiana.
The Company's executive offices are located at 400 West Illinois, Suite
1000, Midland, Texas, 79701 and its telephone number is (915) 683-3092.
COMMON STOCK OFFERING
Concurrently with this Notes Offering, the Company is offering 4,000,000
shares of its Common Stock. The Notes Offering and the Common Stock Offering are
each conditioned upon the consummation of the other.
17
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offerings are estimated to be $151.8 million,
assuming an initial public offering price of $15 per share in the Common Stock
Offering ($160.2 million if the underwriters' over-allotment option with respect
to the Common Stock Offering is exercised). Approximately $125 million of such
proceeds, including all the net proceeds of the Notes Offering, will be used to
repay all of the existing senior indebtedness of the Company (the "Existing
Debt") incurred in connection with the 1996 Acquisition, and to refinance its
previous credit facility. The Existing Debt matures in June 1999. Approximately
$30 million of the Existing Debt currently bears interest at 14.0% per annum and
the balance currently bears interest at a rate selected by the Company equal to
a base rate (generally the prime rate established by NationsBank, N.A.) plus
0.75% or LIBOR plus 3.0%. See "Description of Other Indebtedness." In addition,
$20.4 million of the net proceeds will be used to pay certain amounts incurred
in connection with the Corporate Reorganization, including $15.4 million to
redeem certain membership interests of NBCC in the LLC prior to the Merger, $0.7
million to acquire the stock of Valley and the assets of CSL and $4.3 million in
distributions to the members of the LLC, $3.5 million of which, in the case of
Messrs. Liedtke, Grella and Musselman, will be provided to such persons for
certain estimated federal income tax effects of the Merger. See "Certain
Transactions." The remaining estimated net proceeds of $6.4 million will be used
by the Company for general corporate purposes.
The following is a description of sources and uses of proceeds from the
Offerings, assuming the underwriters' over-allotment option in connection with
the Common Stock Offering is not exercised (in millions):
<TABLE>
<S> <C>
Sources:
Notes Offering................................................... $ 100.0
Common Stock Offering............................................ 60.0
---------
$ 160.0
---------
---------
Uses:
Refinance Existing Debt.......................................... $ 125.0
Redeem membership interests...................................... 15.4
Distributions to individual members to pay estimated income tax
liability of such members....................................... 3.5
Pro rata distribution to remaining member........................ 0.8
Purchase of stock of Valley and assets of CSL.................... 0.7
Working capital.................................................. 6.4
Estimated fees, commissions, underwriting discounts and expenses
related to the Offerings........................................ 8.2
---------
$ 160.0
---------
---------
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of March 31, 1996, on an historical basis and on a pro forma basis giving
effect to the 1996 Acquisition, the Corporate Reorganization and the Offerings
and the application of the net proceeds therefrom, as if such transactions had
been consummated as of March 31, 1996, assuming an initial offering price for
the Common Stock in the Common Stock Offering of $15 per share. The following
table should be read in conjunction with the Consolidated Financial Statements
of the LLC, the unaudited Pro Forma Condensed Financial Statements, the related
notes, and the other information contained elsewhere in this Prospectus,
including the information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." For further information
regarding the terms of the long-term debt reflected in the following table, see
"Description of Other Indebtedness" and Note 7 and Note 12 of the Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
HISTORICAL PRO FORMA
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Existing debt.......................................................................... $ 74,494 $ --
Credit Facility........................................................................ -- --
% Senior Subordinated Notes due 2006................................................ -- 100,000
--------- -----------
Total long-term debt..................................................................... 74,494 100,000
--------- -----------
Redeemable members' capital.............................................................. 11,678 --
--------- -----------
Members' capital and stockholders' equity:
Members' capital....................................................................... (7,535) --
Preferred stock, $.10 par value (3,000,000 shares authorized; no shares issued or
outstanding).......................................................................... -- --
Common Stock, $.10 par value (20,000,000 shares authorized; no shares outstanding
actual, 10,000,000 shares outstanding pro forma)...................................... -- 1,000
Paid-in capital........................................................................ -- 34,843
--------- -----------
Total members' capital and stockholders' equity.......................................... ( 7,535) 35,843
--------- -----------
Total capitalization..................................................................... $ 78,637 $ 135,843
--------- -----------
--------- -----------
</TABLE>
19
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Financial Statements of the Company have
been prepared to give effect to the 1995 Acquisition and the 1996 Acquisition,
the Corporate Reorganization, and the Offerings and the application of the
estimated net proceeds therefrom as if such transactions (to the extent not
already reflected) had taken place on March 31, 1996 for purposes of the Pro
Forma Condensed Balance Sheet and as if the transactions had taken place on
January 1, 1995 for purposes of the Pro Forma Condensed Statements of
Operations. The Pro Forma Condensed Financial Statements of the Company are not
necessarily indicative of the results for the periods presented had the 1995
Acquisition and the 1996 Acquisition, the Corporate Reorganization, and the
Offerings and the application of the estimated net proceeds therefrom taken
place on January 1, 1995. In addition, future results may vary significantly
from the results reflected in the accompanying Pro Forma Condensed Financial
Statements because of normal production declines, changes in product prices, and
the success of future exploration and development activities, among other
factors. This information should be read in conjunction with the Consolidated
Financial Statements of Costilla Energy, L.L.C. and subsidiaries, and the
Statements of Revenues and Direct Operating Expenses with respect to the
properties acquired in the 1995 Acquisition and the 1996 Acquisition, all
included elsewhere herein.
20
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED BALANCE SHEET -- UNAUDITED
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRE OFFERING PRO FORMA COSTILLA
COSTILLA PRO FORMA COSTILLA OFFERING ENERGY,
ASSETS L.L.C. ADJUSTMENTS L.L.C. ADJUSTMENTS INC.
- ------------------------------------------------------ ------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,760 $ (700)(3) $ 2,060 $ (4,259)(4) $ 13,498
151,800(5)
(136,103)(6)
Restricted cash..................................... 250 250 250
Accounts receivable................................. 7,584 7,584 7,584
Prepaid and other current assets.................... 800 800 800
------------- ------------- -----------
Total current assets............................ 11,394 10,694 22,132
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties................................... 83,965 40,500(1) 124,465 124,465
Unproved properties................................. 3,580 3,580 3,580
Accumulated depreciation, depletion and
amortization....................................... (11,281) (11,281) (11,281)
------------- ------------- -----------
76,264 116,764 116,764
Other property and equipment, net..................... 1,024 700(3) 1,724 1,724
Deferred charges (Note 2)............................. 1,658 3,650(1) 3,650 3,813(5) 3,813
(1,658)(2) (3,650)(6)
Note receivable -- affiliate.......................... 684 684 684
------------- ------------- -----------
$ 91,024 $ 133,516 $ 145,117
------------- ------------- -----------
------------- ------------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND EQUITY
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Trade accounts payable.............................. $ 6,190 $ (3,113)(1) $ 3,077 $ 3,077
Undistributed revenue............................... 1,026 1,026 1,026
Other current liabilities........................... 2,074 2,074 2,074
------------- ------------- -----------
Total current liabilities....................... 9,290 6,177 6,177
Long-term debt, less current maturities............... 74,494 47,263(1) 121,757 $ 100,000(5) 100,000
(121,757)(6)
Deferred income....................................... 3,097 3,097 3,097
------------- ------------- -----------
Total liabilities............................... 86,881 131,031 109,274
Redeemable members' capital........................... 11,678 11,678 (11,678)(6) --
Members' capital and capital of affiliates............ (7,535) (1,658)(2) (9,193) 9,193(4) --
Stockholders' equity.................................. -- -- (2,668)(6) 35,843
(4,259)(4)
(9,193)(4)
55,613(5)
(3,650)(6)
------------- ------------- -----------
$ 91,024 $ 133,516 $ 145,117
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE OFFERING PRO FORMA
COSTILLA 1995 1996 PRO FORMA COSTILLA OFFERING
L.L.C. ACQUISITION ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS
------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 21,816 $ 10,930 $ 19,891 $ 52,637
Expenses:
Oil and gas production.................. 10,355 5,473 11,409 $ (300)(3) 26,937
General and administrative.............. 3,571 -- -- (172)(3) 4,850
1,451(7)
Exploration and abandonment............. 1,650 109 1,002 2,761
Depreciation, depletion and
amortization........................... 6,095 -- -- 100(3) 14,313
8,118(8)
Interest................................ 4,454 9,388(9) 13,842 $ (2,211)(10)
Other................................... 2 -- -- 2
------------- ----------- ----------- -------------
26,127 5,582 12,411 62,705
------------- ----------- ----------- -------------
Net income (loss) before federal income
taxes.................................... (4,311) 5,348 7,480 (10,068)
Provision for federal income taxes........ 3 -- -- 3
------------- ----------- ----------- -------------
Net income (loss)......................... $ (4,314) $ 5,348 $ 7,480 $ (10,071)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Net income (loss) per share...............
<CAPTION>
PRO FORMA
COSTILLA
ENERGY,
INC.
-----------
<S> <C>
Revenues.................................. $ 52,637
Expenses:
Oil and gas production.................. 26,937
General and administrative.............. 4,850
Exploration and abandonment............. 2,761
Depreciation, depletion and
amortization........................... 14,313
Interest................................ 11,631
Other................................... 2
-----------
60,494
-----------
Net income (loss) before federal income
taxes.................................... (7,857)
Provision for federal income taxes........ 3
-----------
Net income (loss)......................... $ (7,860)
-----------
-----------
Net income (loss) per share............... $ (0.80)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
22
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRE OFFERING PRO FORMA COSTILLA
1996 PRO FORMA COSTILLA OFFERING ENERGY,
COSTILLA L.L.C. ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS INC.
--------------- ----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 8,951 $ 5,087 $ 14,038 $ 14,038
Expenses:
Oil and gas production................. 3,659 2,699 $ (75)(3) 6,283 6,283
General and administrative............. 1,362 -- (43)(3) 1,505 1,505
186 (7)
Exploration and abandonment............ 228 247 475 475
Depreciation, depletion and
amortization.......................... 1,986 -- 25(3) 3,166 3,166
1,155(8)
Interest............................... 1,704 -- 2,330(9) 4,034 $ (1,126)(10) 2,908
------- ----------- ------------- -----------
8,939 2,946 15,463 14,337
------- ----------- ------------- -----------
Net income (loss) before federal income
taxes................................... 12 2,141 (1,425) (299)
------- ----------- ------------- -----------
Net income (loss)........................ $ 12 $ 2,141 $ (1,425) $ (299)
------- ----------- ------------- -----------
------- ----------- ------------- -----------
Net income (loss) per share.............. $ (0.03)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
23
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The Pro Forma Condensed Financial Statements of the Company have been
prepared to give effect to the 1995 Acquisition and the 1996 Acquisition, the
Corporate Reorganization and the Offerings and the application of estimated net
proceeds therefrom, as if such transactions had taken place on March 31, 1996
for purposes of the Pro Forma Condensed Balance Sheet (with the exception of the
1995 Acquisition which was previously reflected in the balance sheet of Costilla
Energy, L.L.C.), and as if each of the transactions had taken place on January
1, 1995 for purposes of the Pro Forma Condensed Statements of Operations. The
1995 Acquisition and 1996 Acquisition are accounted for by the purchase method.
Costilla L.L.C. -- Represents the consolidated balance sheet of
Costilla Energy, L.L.C. and subsidiaries as of March 31, 1996 and the
related consolidated statements of operations for the year ended
December 31, 1995 and the three months ended March 31, 1996.
1995 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1995 Acquisition for the
period from January 1, 1995 to June 12, 1995 (date of the 1995
Acquisition).
1996 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1996 Acquisition for the year
ended December 31, 1995 and the three months ended March 31, 1996. The
1996 Acquisition was completed on June 14, 1996.
NOTE 2. -- PRO FORMA ENTRIES
(1) To record the issuance of additional long-term debt under the Existing
Debt Facility (as defined under "Description of Other Indebtedness") funded on
June 14, 1996 (net of amounts used to repay indebtedness under the previous
credit agreement), and to record the use of the net proceeds for the 1996
Acquisition, to pay debt issuance fees associated with the Existing Debt
approximating $3,650,000 (including amounts which would be required to be paid
in September 1996), and to reflect payment of certain trade accounts payable.
(2) To record the write-off of capitalized loan fees associated with the
previous credit agreement.
(3) To record the acquisition of Valley Gathering Company and CSL Management
Corporation from certain members of Costilla Energy, L.L.C. and to record the
related additional depreciation and amortization, and reduction in oil and gas
production and general and administrative expenses.
(4) To reflect the Corporate Reorganization including the transfer of
members' and affiliates' capital to stockholders' equity; and to reflect the
distribution of cash to certain members. See "Use of Proceeds".
(5) To reflect the issuance of 4,000,000 shares of Common Stock at an
estimated price of $15 per share for estimated proceeds of $55,613,000, net of
estimated expenses of the Common Stock Offering, and issuance of the Notes at
$100,000,000; and to reflect payment of related debt issuance expenses of
$3,812,000.
(6) To record the repayment of the Existing Debt and the write-off of
related debt issuance costs and the repurchase of redeemable members' capital
for approximately $14,346,000 from proceeds of the Offerings.
(7) Estimated incremental general and administrative expenses necessary due
to estimated public reporting costs and increased personnel required to
administer the properties acquired in the 1996 Acquisition and to reflect
incremental general and administrative expenses due to the 1995 Acquisition
experienced subsequent to June 12, 1995.
24
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. -- PRO FORMA ENTRIES (CONTINUED)
(8) To record estimated incremental depletion expense for the properties
acquired in the 1995 Acquisition from January 1, 1995 through June 12, 1995
(date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 through March 31, 1996.
(9) To adjust interest expense to reflect additional borrowings for the
properties acquired in the 1995 Acquisition from January 1, 1995 to June 12,
1995 (date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition for the period of January 1, 1995 through March 31, 1996. The
adjustment also reflects adjusted interest expense due to the Existing Debt.
Also included is the amortization of estimated debt issuance costs of $3,650,000
over a three-year period.
(10) To adjust interest expense to reflect issuance of the Notes plus the
amortization of estimated debt issuance costs over 10 years.
NOTE 3. -- INCOME TAXES
Upon consummation of the Corporate Reorganization, the Company intends to
account for income taxes pursuant to the provisions of SFAS 109. At March 31,
1996, the pro forma tax basis of the Company's assets and liabilities exceeded
the pro forma book basis by approximately $6,400,000. The pro forma temporary
differences are primarily related to the differences in book and tax basis of
oil and gas properties due to the expensing of intangible development costs for
tax purposes and other income tax differences arising from the tax treatment of
oil and gas producing activities.
NOTE 4. -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based on the pro forma weighted
average shares outstanding during the respective periods. Weighted average
shares reflect the pro forma issuance of 1,080,008 shares of Common Stock to
NBCC on February 17, 1995 and the pro forma issuance of 4,919,992 shares of
Common Stock to the remaining holders prior to January 1, 1995. In addition, the
issuance of 4,000,000 shares in the Common Stock Offering is assumed to have
taken place on January 1, 1995 and assumes that the underwriters' over-allotment
option is not exercised.
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
The estimates of proved oil and gas reserves, which are located in the
United States, were prepared by the Company as of December 31, 1993, 1994 and
1995, and Williamson as of March 31, 1996. Reserves were estimated in accordance
with guidelines established by the Securities and Exchange Commission and FASB
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the pro forma reserve
estimates utilizing an oil price of $17.79 per Bbl and a gas price of $2.03 per
Mcf as of December 31, 1995, and an oil price of $20.91 per Bbl and a gas price
of $2.02 per Mcf as of March 31, 1996. The pro forma reserve information assumes
that both the 1995 Acquisition and the 1996 Acquisition took place on January 1,
1995.
25
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise that those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND GAS
CONDENSATE (MBBLS) (MMCF)
------------------- -----------
<S> <C> <C>
Balance, January 1, 1995.............................................. 17,990 115,281
Revisions of previous estimates..................................... (570) 425
Extensions and discoveries.......................................... 605 8,922
Production.......................................................... (2,085) (11,984)
------- -----------
Balance, December 31, 1995............................................ 15,940 112,644
Revisions of previous estimates..................................... 436 2,614
Extensions and discoveries.......................................... 592 296
Production.......................................................... (492) (2,634)
------- -----------
Balance, March 31, 1996............................................... 16,476 112,920
------- -----------
------- -----------
Proved Developed Reserves:
December 31, 1995................................................... 13,235 87,345
March 31, 1996...................................................... 13,552 84,369
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying period-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future production of
proved oil and gas reserves less estimated future expenditures (based on period-
end costs) to be incurred in developing and producing the proved reserves, less
estimated future income tax expenses (based on period-end statutory tax rates,
with consideration of future tax rates already legislated) to be incurred on
pretax net cash flows less tax basis of properties and available credits, and
assuming continuation of existing economic conditions. The estimated future net
cash flows are then discounted using a rate of 10% per year to reflect the
estimated timing of the future cash flows.
26
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Future cash flows........................................................... $ 512,363 $ 572,425
Future costs:
Production................................................................ (239,388) (253,347)
Development............................................................... (20,907) (22,076)
------------ ------------
Future net cash flows....................................................... 252,068 297,002
10% annual discount for estimated timing of cash flows...................... (98,695) (117,475)
------------ ------------
Discounted future net cash flows............................................ 153,373 179,527
Future income taxes......................................................... (12,739) (22,302)
------------ ------------
Standardized measure of discounted net cash flows........................... $ 140,634 $ 157,225
------------ ------------
------------ ------------
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved
Reserves:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
Increase (decrease):
Extensions and discoveries and improved recovery, net of future
production and development costs.................................... $ 9,598 $ 6,002
Accretion of discount................................................ 14,147 3,516
Net change in sales prices, net of production costs.................. 2,992 20,807
Changes in estimated future development costs........................ (1,651) (238)
Revisions of quantity estimates...................................... (2,392) 4,694
Net change in income taxes........................................... 1,633 (9,563)
Sales, net of production costs....................................... (27,055) (7,264)
Changes of production rates (timing) and other....................... 1,893 (1,363)
------------ ----------------
Net increase (decrease)............................................ (835) 16,591
Standardized measure of discounted future net cash flows:
Beginning of period.................................................. 141,469 140,634
------------ ----------------
End of period........................................................ $ 140,634 $ 157,225
------------ ----------------
------------ ----------------
</TABLE>
27
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data of Costilla Energy,
L.L.C. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The historical information should be read in conjunction
with the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus. Costilla Energy, L.L.C. acquired significant
producing oil and gas properties in certain of the periods presented which
affect the comparability of the historical financial and operating information.
The historical results are not necessarily indicative of the Company's future
operations or financial results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues....................... $ 1,623 $ 2,364 $ 4,231 $ 7,637 $ 21,693 $ 2,177 $ 8,833
Total revenues........................... 2,134 2,887 4,397 7,836 21,816 2,180 8,951
Expenses:
Oil and gas production................. 769 1,340 1,688 2,351 10,355 896 3,659
General and administrative............. 354 388 952 1,184 3,571 459 1,362
Exploration and abandonment............ 106 4 218 793 1,650 1,007 228
Depreciation, depletion and
amortization.......................... 494 404 884 1,847 6,095 462 1,986
Interest............................... 179 365 605 1,458 4,454 407 1,704
Other.................................. -- -- -- -- 2 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before income taxes.... 232 386 50 203 (4,311) (1,051) 12
Net income (loss)........................ 234 368 73 163 (4,314) (1,051) 12
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities................... $ 276 $ 140 $ 322 $ 1,527 $ 6,366 $ (1,827) $ 2,276
Investing activities................... (2,659) (1,432) (6,731) (12,146) (62,467) (1,389) (5,132)
Financing activities................... 2,440 1,450 6,315 10,618 58,830 3,272 3,000
OTHER FINANCIAL DATA:
Capital expenditures..................... $ 3,092 $ 3,720 $ 6,862 $ 11,868 $ 62,220 $ 1,389 $ 5,132
Distributions to members................. -- -- 456 961 55 55 --
EBITDA (1)............................... 1,011 1,159 1,757 4,301 7,888 825 3,930
EBITDA/Interest expense (2).............. 5.6x 3.2x 2.9x 2.9x 1.8x 2.0x 2.3x
Ratio of earnings to fixed charges (3)... 1.3 1.5 1.0 1.1 -- -- 1.0
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital.......................... $ (580) $ 185 $ 1,612 $ 1,081 $ 2,496 -- $ 2,104
Total assets............................. 4,602 6,675 13,365 24,904 87,367 -- 91,024
Total debt............................... 2,870 5,304 12,006 23,591 71,494 -- 74,494
Redeemable members' capital.............. -- -- -- -- 11,320 -- 11,678
Members' capital......................... 504 434 51 (747) (7,189) -- (7,535)
</TABLE>
- ------------------------------
(1) EBITDA is presented because of its wide acceptance as a financial indicator
as to a company's ability to service or incur debt. EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's financial performance or to cash flow as a measure of liquidity.
(2) Calculated by dividing EBITDA by interest. Interest includes interest
expense accrued and amortization of deferred financing costs.
(3) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) plus income taxes and fixed charges. Fixed
charges are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of operating lease expense which is deemed
to be representative of an interest factor. Earnings were insufficient to
cover fixed charges by $4,311,000, and $1,051,000 for the historical periods
ended December 31, 1995 and March 31, 1995, respectively.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's predecessor
began operating in 1988 and through mid-1995 had grown primarily through a
series of small acquisitions of oil and gas properties and the exploitation of
those properties. In June 1995, Costilla consummated the 1995 Acquisition for a
purchase price of approximately $46.6 million, and in June 1996, the 1996
Acquisition was consummated for a purchase price of approximately $42.5 million.
To date, the Company has achieved its high rate of growth primarily through
acquisitions. This has impacted its reported financial results in a number of
ways. Properties sold by others frequently have not received focused attention
prior to sale. After acquisition, certain of these properties are in need of
maintenance, workovers, recompletions and other remedial activity not
constituting capital expenditures, which substantially increase lease operating
expenses. The increased production and revenue resulting from these expenditures
is predominately realized in periods subsequent to the period of expense. In
addition, the rapid growth of the Company has required it to develop operating,
accounting and administrative personnel compatible with its increased size. The
Company believes it has now achieved a sufficient size to expand its reserve
base without a corresponding increase in its general and administrative expense.
The Company also believes it now has a sufficient inventory of prospects and the
professional staff necessary to follow a more balanced program of exploration
and exploitation activities to complement its acquisition efforts.
Costilla's strategy is to increase its oil and gas reserves, production and
cash flow from operations through a two-pronged approach which combines an
active exploration program with the acquisition and exploitation of proved
reserves. In addition, Costilla continues to evaluate the acquisition of
undeveloped acreage for its exploration efforts. Costilla has in-house
exploration expertise using 3-D seismic technology to identify new drilling
opportunities as well as for the exploitation of acquired properties.
Costilla has shown a significant increase in its oil and gas reserves,
production and EBITDA, especially due to the 1995 Acquisition and the 1996
Acquisition. The following table sets forth certain operating data of Costilla
for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (MBbls)....................................... 158 330 950 86 338
Gas (Mmcf)........................................ 865 1,600 4,806 477 1,643
MBOE.............................................. 302 597 1,751 166 612
AVERAGE SALES PRICES (1):
Oil (per Bbl)..................................... $ 16.93 $ 15.25 $ 15.53 $ 17.82 $ 17.32
Gas (per Mcf)..................................... 1.82 1.63 1.45 1.34 1.81
PRODUCTION COST (2):
Per BOE (3)....................................... $ 5.59 $ 3.94 $ 5.91 $ 5.40 $ 5.98
Per dollar of sales............................... 0.40 0.31 0.48 0.41 0.41
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE........................................... $ 2.93 $ 3.09 $ 3.48 $ 2.78 $ 3.25
Per dollar of sales............................... 0.21 0.24 0.28 0.21 0.22
</TABLE>
- ------------------------
(1) Before deduction of production taxes and net of hedging results.
(2) Excludes depreciation, depletion and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
29
<PAGE>
(3) Production costs per BOE in 1995 and for the three months ended March 31,
1996 were unusually high as a result of relatively high workover expenses
with respect to properties acquired in the 1995 Acquisition which did not
produce related production improvement until subsequent periods. In
addition, the Company expended approximately $1.6 million during 1995 in
one field in the Permian Basin primarily for plugging wells to comply with
applicable regulatory requirements.
Costilla uses the successful efforts method of accounting for its oil and
gas activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells that result in proved reserves, and to drill
and equip development wells are capitalized. Costs to drill exploratory wells
that do not result in proved reserves, geological, geophysical and seismic
costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted using the unit-of-production method. Unproved oil and
gas properties that are individually significant are periodically reviewed for
impairment of value, and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are amortized based
on the Company's experience of successful drilling and average holding period.
The Company utilizes option contracts to hedge the effect of price changes
on a portion of its future oil and gas production. Premiums paid and amounts
receivable under the option contracts are amortized and accrued to oil and gas
sales, respectively. See "Business and Properties -- Risk Management."
The Company's predecessors were classified as partnerships for federal
income tax purposes. Therefore, no income taxes were paid or provided for by the
Company prior to the Offerings. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
The Company's total oil and gas revenues for the three months ended March
31, 1996 were $8,833,000, representing an increase of $6,656,000 (306%) over
revenues of $2,177,000 for the comparable period in 1995. This increase was
primarily due to the 1995 Acquisition which accounted for approximately
$5,722,000 of the revenue increase.
Oil and gas production was 612 MBOE in the 1996 period compared to 166 MBOE
in the 1995 period. Of the 446 MBOE increase, 380 MBOE was due to the properties
acquired in the 1995 Acquisition. The remainder of the increase was due to a
combination of successful drilling activities and the enhancement of existing
production.
Interest and other revenues were $88,000 for the three months ended March
31, 1996 compared to $3,000 for the comparable period in 1995, representing an
increase of $85,000, which was comprised of an increase in interest income of
$21,000 in 1996 due to increased funds earning interest and $65,000 in oil
marketing income. Also in the 1996 period, the Company realized gains of $30,000
on the sale of various properties for which there were no comparable sales for
the three months ended March 31, 1995.
Oil and gas production costs in the 1996 period were $3,659,000 ($5.98 per
BOE), compared to $896,000 in the 1995 period ($5.40 per BOE), representing an
increase of $2,763,000 (308%), due principally to the 1995 Acquisition. On a per
BOE basis, production costs increased $0.58 due primarily to costs incurred to
exploit the properties acquired in the 1995 Acquisition which did not produce
related production improvement for the full period. In addition, the 1995 period
was negatively affected by operating costs incurred in connection with plugging
and abandoning certain wells on properties acquired in late 1994.
30
<PAGE>
General and administrative expense for the three months ended March 31, 1996
was $1,362,000, representing an increase of $903,000 (197%) from the comparable
period in 1995 of $459,000. The increase is primarily due to an increase in
personnel and related costs necessary to accommodate the increased activities of
the Company due to the 1995 Acquisition and in anticipation of the 1996
Acquisition.
Exploration and abandonment expense decreased to $228,000 in the 1996 period
compared to $1,007,000 in the 1995 period. The Company did not incur seismic
costs for the three months ended March 31, 1996, compared to $467,000 which were
incurred for the comparable period in 1995. Dry hole costs decreased from
$540,000 to $228,000 for the comparable periods in 1995 and 1996, respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$1,986,000 compared to $462,000 for the 1995 period, representing an increase of
$1,524,000 (330%). During 1996, depreciation, depletion and amortization on oil
and gas production was provided at an average rate of $3.25 per BOE compared to
$2.78 per BOE for 1995. The increase was due primarily to the 1995 Acquisition.
Interest expense was $1,704,000 in the 1996 period, compared to $407,000 for
the comparable period in 1995. The $1,297,000 (319%) increase was attributable
to increased levels of debt which the Company used to finance the 1995
Acquisition. The average amounts of applicable interest-bearing debt for the
comparable periods in 1996 and 1995 were $71,923,000 and $19,820,000,
respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's total oil and gas revenues for 1995 were $21,693,000,
representing an increase of $14,056,000 (184%) over revenues of $7,637,000 in
1994. This increase was primarily due to the 1995 Acquisition which accounted
for approximately $12,032,000 of the revenue increase.
Oil and gas production was 1,751 MBOE in 1995 and 597 MBOE in 1994. Of the
1,154 MBOE increase, 1,099 MBOE was due to the properties acquired in the 1995
Acquisition.
Interest and other revenues were $123,000 in 1995 compared to $87,000 in
1994, representing an increase of $36,000 (41%), which was comprised of an
increase in interest income of $59,000 in 1995 due to an increased amount of
funds earning interest, partially offset by a decrease of other income of
$23,000. In 1994, the Company realized a gain of $112,000 on the sale of various
properties for which there were no comparable gains in 1995.
Oil and gas production costs in 1995 were $10,355,000 ($5.91 per BOE),
compared to $2,351,000 in 1994 ($3.94 per BOE), representing an increase of
$8,004,000 (340%). The major portion of the increase was due to increased
production associated with the 1995 Acquisition. In addition, certain acquired
properties required remedial workovers and other activity immediately following
acquisition resulting in unusual operating costs of approximately $600,000
during 1995. In addition, $1,605,000 of operating costs were incurred during
1995 primarily in connection with plugging and abandoning certain wells to
comply with applicable regulatory requirements on properties acquired in late
1994.
General and administrative expense for 1995 was $3,571,000, representing an
increase of $2,387,000 (202%) from 1994 expense of $1,184,000. The increase is
primarily due to an increase in personnel and related costs necessary to
accommodate the increased activities of the Company due to the 1995 Acquisition.
Exploration and abandonment expense increased to $1,650,000 in 1995 compared
to $793,000 in 1994. The increase of $857,000 (108%) was comprised principally
of $790,000 of seismic costs.
Depreciation, depletion and amortization expense for 1995 was $6,095,000
compared to $1,847,000 for 1994, representing an increase of $4,248,000 (230%).
During 1995, depreciation, depletion and amortization on oil and gas production
was provided at an average rate of $3.48 per BOE compared to $3.09 per BOE for
1994. The increase was due primarily to the 1995 Acquisition.
31
<PAGE>
Interest expense was $4,454,000 in 1995 compared to $1,458,000 in 1994. The
$2,996,000 (205%) increase was attributable to increased levels of debt which
the Company used to finance the 1995 Acquisition. The average amounts of
applicable interest-bearing debt in 1995 and 1994 were $49,972,000 and
$17,632,000, respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's total oil and gas revenues for 1994 were $7,637,000,
representing an increase of $3,406,000 (81%) over revenues of $4,231,000 in
1993. The primary reason for the increase in revenues was due to two
acquisitions of properties in 1994, one of which occurred in January 1994 and
the other in October 1994.
Oil and gas production was 597 MBOE in 1994 and 302 MBOE in 1993. The
increase in production of 295 MBOE was principally due to properties acquired
during 1994.
Interest and other revenues were $87,000 in 1994 compared to $56,000 in
1993. The increase of $31,000 was comprised of an increase in interest income of
$26,000 in 1994, due to increased funds earning interest, and an additional
$5,000 in other income.
Oil and gas production costs in 1994 were $2,351,000 ($3.94 per BOE),
compared to $1,688,000 in 1993 ($5.59 per BOE), representing an increase of
$663,000. The increase in production costs is primarily attributable to two
acquisitions in 1994.
In 1994, general and administrative expense was $1,184,000, representing an
increase of $232,000 (24%) from 1993 expense of $952,000. The increase is due to
an increase in personnel and costs related primarily to acquisitions made in
1994.
Exploration and abandonment expense increased to $793,000 in 1994 compared
to $218,000 in 1993. The increase of $575,000 (264%) was due to an increase in
non-productive wells drilled in 1994 compared to 1993.
Depreciation, depletion and amortization expense for 1994 was $1,847,000
compared to $884,000 for 1993, representing an increase of $963,000 (109%),
primarily due to increased production. During 1994, depreciation, depletion and
amortization expense on oil and gas production was provided at an average rate
of $3.09 per BOE compared to $2.93 per BOE for 1993. The increase was due to
increased drilling and development, and the acquisition of additional
properties.
Interest expense was $1,458,000 in 1994 compared to $605,000 in 1993. The
$853,000 increase was attributable to increased debt levels related primarily to
the Company's acquisition of additional oil and gas properties in 1994. The
average amount of applicable interest-bearing debt in 1994 and 1993 was
$17,632,000 and $8,258,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES
Funding for the Company's business activities has historically been provided
by bank financings, cash flow from operations, private equity sales, property
divestitures and joint ventures with industry participants. The Company
completed a $10 million private equity placement in February 1995. Subsequently,
the 1995 Acquisition and the 1996 Acquisition were substantially funded by bank
financings. The Company plans to finance its continuing operations and execute
its business strategy with cash flow from operations, net proceeds from the
Offerings and borrowings under the Credit Facility.
The Company believes that cash flow from operations and borrowing
availability under the Credit Facility will be sufficient for anticipated
operating and capital expenditure requirements. However, because future cash
flows and the availability of financing are subject to a number of variables
beyond the Company's control, there can be no assurance that the Company's
capital resources will be sufficient to maintain currently planned levels of
capital expenditures.
32
<PAGE>
While the Company regularly engages in discussions relating to potential
acquisitions, the Company has no present agreement, commitment or understanding
with respect to any such acquisition, other than the acquisition of undeveloped
acreage and royalty and overriding royalty interests in its normal course of
business. Any future acquisition may require additional financing and will be
dependent upon financing arrangements available at the time.
The Company is in discussion with several banks to provide the Credit
Facility following the closing of the Offerings. The Company anticipates that it
will have approximately $50.0 million available under the Credit Facility, none
of which is expected to be outstanding immediately following the Offerings.
Although certain of the Company's costs and expenses may be affected by
inflation, inflationary costs have not had a significant effect on the Company's
results of operations.
CAPITAL EXPENDITURES
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
The following table sets forth costs incurred by the Company in its
development, exploration and acquisition activities during the periods
indicated. The table does not include the 1996 Acquisition which was consummated
in June 1996 for an approximate purchase price of $42.5 million.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs...................................... $ -- $ -- $ 158 $ 232
Exploration costs...................................... 2,017 2,167 5,627 1,822
Acquisition costs:
Unproved properties.................................. 829 1,232 1,742 677
Proved properties.................................... 4,665 9,649 52,470 2,246
--------- --------- --------- -------------
$ 7,511 $ 13,048 $ 59,997 $ 4,977
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
The Company anticipates that costs incurred for 1996 will be approximately
$64.8 million, of which approximately $42.5 million was expended for the 1996
Acquisition, and approximately $5.0 million was expended for exploration and
development activities during the three months ended March 31, 1996.
33
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin, the Gulf Coast and the Rocky Mountain
regions. The Company's strategy focuses on increasing reserves through targeted
exploration programs, the exploitation of its existing properties and selective
property acquisitions. In addition, the Company recently acquired an interest in
a concession for the development of mineral interests in the Republic of
Moldova, in Eastern Europe. The Company also has minor interests in the domestic
gas gathering and transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of March 31, 1996, the Company had total
estimated net proved reserves (as defined below) of 16.5 Mmbbls of oil and 112.9
Bcf of gas, aggregating 35.3 MMBOE, with a PV-10 Value of approximately $179.5
million, assuming the 1996 Acquisition (as defined below) had occurred at March
31, 1996. The Company also has substantial undeveloped acreage consisting of
205,908 gross (141,384 net) undeveloped acres. The Company has identified in
excess of 200 drilling locations of which 82 are included in its proved
reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities, and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 23 wells based on these
3-D surveys, 20 of which have been productive. The Company has recently
completed a third 3-D survey in Pecos County, Texas and intends to commence
drilling on this acreage in the second half of 1996. Moreover, the Company is
currently conducting two additional 3-D surveys. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and EBITDA. The Company increased its estimated proved reserves from
6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at March 31, 1996 (pro forma for
the 1996 Acquisition), representing a compound annual growth rate of 114%. This
reserve growth has been achieved at an average all-in finding cost of $3.49 per
BOE over such period, a level which the Company believes is lower than industry
averages. Concurrently, the Company increased its average net daily production
from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for the three
months ended March 31, 1996 (pro forma for the 1996 Acquisition), representing a
compound annual growth rate of 195%. EBITDA increased at a 240% compound annual
growth rate from $1.8 million for 1993 to $20.8 million for 1995 (pro forma for
the 1995 Acquisition and the 1996 Acquisition).
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a diverse portfolio of
properties. The Company also seeks to manage the elements of its business
strategy through the operation of a significant portion of its properties, the
use of a disciplined rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- - EXPLORATION EFFORTS. The Company uses extensive geological and geophysical
analysis to carefully focus its 3-D seismic surveys. This focus allows the
Company to successfully direct the size and scope of its exploration program
in order to improve the likelihood of success while managing overall
exploration costs. The Company's exploration efforts are concentrated
currently on known
34
<PAGE>
producing regions. The Company plans to drill 26 exploratory wells during the
remainder of 1996 and 36 exploratory wells in 1997. Capital budgeted for
exploration activities is $8.4 million for the last nine months of 1996 and
$10.8 million for 1997.
- - EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers and infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.9 million for
the last nine months of 1996 and $9.2 million for 1997, which includes the
drilling of 17 development wells in 1996 and 13 development wells in 1997.
- - PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying and
developing previously unproved reserves on acquired acreage. The Company
seeks to acquire reserves which will fit its existing portfolio, are
generally not being actively marketed and where a negotiated sale would be
the method of purchase. The Company does not rely on major oil company
divestitures or property auctions.
- - PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities in
distinct regions it is able to reduce commodity price and other operational
risks. The Company's Moldovan interest is an extension of this strategy and
can be characterized by low initial costs, significant reserve potential and
the availability of technical data that may be further developed by the
Company.
- - CONTROL OF OPERATIONS. The Company prefers to operate and own the majority
working interest in its properties. This allows the Company greater control
over future development, drilling, completing and lifting costs and marketing
of production. At December 31, 1995, the Company operated wells constituting
approximately 65% of its total PV-10 Value (pro forma for the 1996
Acquisition).
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 6.9 Mmbbls of oil and 40.0 Bcf of gas, aggregating
13.6 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At March 31, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at March 31, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 42,855 gross
(10,172 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
35
<PAGE>
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of March 31, 1996
(pro forma for the 1996 Acquisition), which relates to the principal oil and gas
properties owned by the Company.
<TABLE>
<CAPTION>
PROVED RESERVES
----------------------------------------------------------
TOTAL OIL PERCENT OF
GROSS OIL GAS EQUIVALENT TOTAL OIL
AREA WELLS (MBBLS) (MMCF) (MBOE) EQUIVALENT
- ---------------------------------------------------------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Permian Basin............................................. 1,890 9,200 55,200 18,400 52.1%
Gulf Coast................................................ 968 2,054 38,440 8,461 24.0
Rocky Mountain............................................ 236 4,526 12,886 6,674 18.9
Other..................................................... 428 696 6,394 1,762 5.0
--------- --------- --------- ----------- -----
Total..................................................... 3,522 16,476 112,920 35,297 100.0%
--------- --------- --------- ----------- -----
--------- --------- --------- ----------- -----
</TABLE>
PERMIAN BASIN. At March 31, 1996, 52.1% of the Company's proved reserves
were concentrated in the Permian Basin, an approximately 70-county region in
West Texas and Southeast New Mexico. The Company's production comes from well
known fields such as the Spraberry Trend, Sawyer Canyon, Goldsmith Unit and
Susan Peak. The majority of the Company's producing intervals in the Permian
Basin range from 4,500 feet to 9,500 feet in depth.
The Company has several exploratory projects in the Permian Basin based
primarily on 3-D seismic surveys. The most significant include:
EDWARDS/MCELROY RANCH PROSPECT, ECTOR AND CRANE COUNTIES, TEXAS. Costilla
has identified 75 drilling locations on the Company's 9,849 gross (4,334 net)
acres in this prospect based on 3-D seismic data. The Company successfully
completed the Edwards 14-1 well in the Strawn formation in May 1996, which
initially flowed at a rate of 360 Bbls of oil per day and 258 Mcf of gas per
day. At June 30, 1996, the well was flowing at a rate of 150 Bbls of oil and 85
Mcf of gas per day. Six miles south of the Edwards 14-1 well, Costilla has
drilled the University 30-1 well, which has confirmed the Strawn and Wolfcamp
trends defined by the Company's extensive approximate 50-square mile 3-D seismic
project undertaken jointly with Texaco Exploration and Producing, Inc.
("Texaco"). This well is currently being completed. Two additional wells are
being drilled on seismic delineated features similar to the initial Edwards
discovery. The Company plans to drill 25 wells in this trend through 1997. The
Company's working interest in this prospect is approximately 44%.
Costilla and Texaco are also developing a Queen Sand field identified from
the Edwards/McElroy Ranch seismic program. The four wells drilled through June
30, 1996 are producing an aggregate of approximately 80 Bbls of oil per day and
the Company is in the process of completing two additional wells. Drilling of
six wells is anticipated through 1997, with the field ultimately being developed
on a planned waterflood pattern in order to maximize recovery of the oil in
place.
MCGYVER-GREEN ACRES PROSPECT, HOWARD COUNTY, TEXAS. The Company has
identified 41 drilling locations in this prospect based on information derived
from approximately 30 square miles of 3-D seismic data that the Company acquired
on the area in 1994. The Talbot Fuller well was the first well drilled by the
Company on this prospect and was completed in the Canyon Lime formation at 8,200
feet in August 1994. Since completion, the well has produced 62,000 Bbls of oil
and 207 Mmcf of gas, and averaged 77 Bbls of oil per day and 320 Mcf of gas per
day during June 1996. Subsequent to the first well, 11 additional wells have
been drilled on this prospect of which ten are productive. The Company intends
to drill eight additional wells during the balance of 1996 on its 9,148 gross
(6,587 net) acres. The Company's working interest in this prospect averages
approximately 72%.
The following two 3-D programs currently being undertaken by the Company in
the Permian Basin are expected to provide additional drilling locations:
36
<PAGE>
WILSON RANCH 3-D PROJECT, PECOS COUNTY, TEXAS. The Wilson Ranch is located
in northeastern Pecos County, approximately 10 miles west of the Yates field.
The Company recently completed an approximate 17-square mile seismic survey on
the project. A second phase will be initiated in the first quarter of 1997. The
project presents several potential exploration targets, including the Queen, San
Andres, Wolfcamp, Devonian and Ellenberger formations, found at depths ranging
from 1,600 to 8,000 feet. The Company has agreed to lease 3,750 gross acres on
this 50,000 acre ranch. Upon acquiring the lease, the Company intends to sell
one-half of its approximate 75% working interest. The Company believes that
there is significant additional potential in this area.
DAVAN UNIT 3-D PROJECT, STONEWALL COUNTY, TEXAS. The Company has another
3-D seismic project under way with Texaco to further develop the
Company-operated Davan Unit. The project involves a 3-D seismic evaluation of
approximately 3,200 gross acres adjacent to a Company-operated waterflood which
has produced in excess of three Mmbbls of oil.
Two examples of the Company's current exploitation efforts in the Permian
Basin include:
EAST GOLDSMITH FIELD QUEEN DISCOVERY AND C02 PROJECT, ECTOR COUNTY,
TEXAS. The Company owns 3,053 gross (2,073 net) acres in this field located 20
miles northwest of Midland, Texas. Since its discovery, the field has produced
in excess of 17 Mmbbls of oil from seven formations. The most productive zones
in the East Goldsmith Field have been the San Andres and Holt formations, both
of which have been subject to secondary recovery by waterflooding. The Company
has been analyzing a tertiary recovery project in those formations using CO2,
and intends to initiate the project in the fourth quarter of 1996. The Company's
working interest in this project averages approximately 87%.
SUSAN PEAK FIELD WORKOVER AND HORIZONTAL DRILLING PROGRAM, TOM GREEN COUNTY,
TEXAS. The Company recently completed the first horizontal well in this field
located south of San Angelo, Texas, in which it owns a 100% working interest
until payout. Production from this well drilled in the Strawn formation was 110
Bbls of oil per day and 240 Mcf of gas per day on June 30, 1996. Since February
1996, with only two workovers and the new horizontal well, the Company has
increased Susan Peak production from approximately 30 Bbls of oil per day and
700 Mcf of gas per day to a current rate of approximately 200 Bbls of oil per
day and 2,000 Mcf of gas per day. Two possible horizontal drilling locations and
additional workover candidates remain on this 7,461 gross (3,730 net) acre
lease. The Company's working interest in this project ranges from 50% to 100%.
GULF COAST. At March 31, 1996, 24.0% of the Company's proved reserves were
concentrated in the Gulf Coast region. The Company's production in this region
primarily comes from known formations such as Frio, Yegua, Austin Chalk and
Wilcox.
The Company plans to use its expertise in aggressively developing 3-D
opportunities on the extensive acreage position it holds in the region. Examples
of such exploration projects in progress include:
SEALY PROSPECT, AUSTIN COUNTY, TEXAS. The Sealy Field, consisting of 3,534
gross (1,767 net) acres, was acquired in the 1995 Acquisition. The Wilcox
formation in this field has produced over 66 Bcf of gas and there are subsurface
indications of the presence of several fault blocks that lie untested. The
Company's working interest in this prospect is 100%.
SOUTHWEST SPEAKS, LAVACA COUNTY, TEXAS. This project, consisting of 5,078
gross (2,539 net) acres, was also acquired in the 1995 Acquisition and is held
by several shallow Company-operated wells. Multiple producing horizons from
shallow depths to below 14,000 feet have produced over 199 Bcf of gas from this
highly faulted field. A recent well was completed in the Rainbow Wilcox sand on
acreage adjoining Costilla's lease. A well, in which Costilla holds a 5%
interest as a result of a farmout, has also been completed on Costilla's lease.
The Company's plans include a 3-D survey in the Speaks area. The Company's
working interest in this prospect is approximately 50%.
BORCHERS FIELD, LAVACA COUNTY, TEXAS. This field was acquired by the
Company in the 1996 Acquisition. The property is on trend with the Speaks
project and is also a highly faulted field
37
<PAGE>
providing opportunity for further development. The Borchers field has produced a
total of 17.5 Bcf of gas from two Wilcox sands. Costilla has a 100% working
interest in this field consisting of 1,321 gross and net acres.
Examples of exploitation activities in this region include:
JOSEY RANCH LEASE, HARRIS COUNTY, TEXAS. Two examples of the Company's
production enhancement of Gulf Coast properties were undertaken on this
prospect. When the lease was acquired in the 1995 Acquisition, production had
nearly ceased. Through a series of workovers, the Company has improved daily
production, as of June 30, 1996, to 63 Bbls of oil per day and 73 Mcf of gas per
day. In addition, Costilla has participated in a 13,000 foot test well on the
Josey Ranch lease to test the Wilcox formation. The well was completed in April
1996 and has consistently produced in excess of 1,000 Mcf of gas per day. The
Josey Ranch lease covers 1,661 gross (649 net) acres, and the Company's working
interest in this prospect is approximately 39%.
PERSONVILLE, LIMESTONE COUNTY, TEXAS. The Company has recently completed an
11,200 foot Cotton Valley well, with initial production rates of 1.1 Mmcf of gas
per day prior to stimulation. Costilla leases 412 gross (111 net) acres in this
prospect, and has identified two additional drilling locations. The Company is
the operator of this prospect and its working interest is approximately 30%.
AUSTIN CHALK, BRAZOS, BURLESON, FAYETTE AND LEE COUNTIES, TEXAS. Costilla
acquired the majority of the working interest in nine gross Austin Chalk wells
in the 1995 Acquisition and an additional 80 gross Austin Chalk wells were
included in the 1996 Acquisition. The Company intends to enhance production on
certain of these wells through stimulation and workover activities, and analyze
further development potential. Costilla has 30,414 gross (20,985 net) acres in
the Austin Chalk area, and its working interest in this area averages
approximately 69%.
ROCKY MOUNTAIN. At March 31, 1996, 18.9% of the Company's proved reserves
were concentrated in the Rocky Mountain region, which includes Montana, North
Dakota, Wyoming, Colorado and Utah.
RAYMOND FIELD, SHERIDAN COUNTY, MONTANA. Since its discovery in 1972, the
Raymond Field has produced over five Mmbbls of oil from five different
formations. Daily production from the field has increased from 180 Bbls of oil
per day since its acquisition in June 1995 to 369 Bbls of oil per day at June
30, 1996 primarily as a result of the Company's improved operations. The Company
plans a 3-D program on its 960 gross and net acres in this field. The Company
owns a 100% working interest in this prospect.
OUTLOOK FIELD, SHERIDAN COUNTY, MONTANA. The Company undertook its first
Rocky Mountain 3-D seismic survey in the Outlook area to further develop the
field. Three drilling locations were identified from the data. The Company
anticipates commencing an Outlook test well in September 1996 that will be
drilled to 10,500 feet, a depth sufficient to test several different formations.
Costilla leases 5,168 gross (1,292 net) acres in the Outlook prospect, and owns
an approximate 25% working interest in this prospect.
NATURAL BUTTES FIELD, UINTAH COUNTY, UTAH. The Company owns a 100% working
interest in 1,280 gross and net acres in this prospect. Development by prior
owners was on 640-acre spacing while offset acreage has been developed on
80-acre spacing. Low gas prices in the area have precluded the assignment of
proved resources to any undeveloped acres. As gas prices improve, the Company
plans to drill additional wells on the prospect.
The Company owns an interest in significant acreage positions in the Rocky
Mountain region which are operated by third parties and are the subject of
active exploitation efforts. The most significant property is:
CIRCLE RIDGE FIELD, FREMONT COUNTY, WYOMING. The Circle Ridge Field, in
which the Company has an approximate 18% working interest, is operated by
Marathon Oil Company. This field is an approximate 1,100 acre waterflood located
in the Wind River Basin of Wyoming, approximately 30
38
<PAGE>
miles north of Riverton, Wyoming. There are 97 active producing wells and 10
active injection wells in the field. Production originates from the Phosphoria,
Tensleep and Amsden formations that are present at depths ranging from 500 to
2,000 feet. Since January 1995, 45 projects have been completed in the field.
These projects include recompletions, stimulation treatments and reactivations,
which have increased production from 1,469 Bbls of oil per day in January 1995
to a rate of 1,876 Bbls of oil per day for May 1996. The operator has several
other projects scheduled for the remainder of 1996 and is evaluating various
different methods of enhanced oil recovery for the field.
MARKETING ARRANGEMENTS
The Company utilizes an active marketing program for a portion of its crude
oil production in order to enhance the net price it receives. The Company sells
its crude oil production from operated properties in North Dakota, Montana and
Wyoming, at the lease level to an oil transportation company for the posted
price, plus an agreed upon bonus, with a corresponding agreement to repurchase
this production at its delivery point (typically, Cushing, Oklahoma) for a price
equal to the then posted price for West Texas Intermediate crude oil less an
agreed upon deduction for transportation and quality differentials, if any,
between the repurchased crude oil and West Texas Intermediate crude oil. The
Company then employs a broker to resell its crude oil to end users (such as
refineries) on a month-to-month basis. The lease level sales and repurchase
contracts are typically of six months duration. With respect to its other
operated oil production (primarily located in Texas), the Company employs a
similar price enhancement strategy, although the repurchase feature is absent.
Instead, the lease level purchaser resells the crude oil to end users at the
delivery point for the account of the Company. The Company markets its gas
production at the lease level pursuant to month-to-month contracts. No single
purchaser of oil or gas accounted for in excess of 10% of the Company's
consolidated revenues for the year ended December 31, 1995.
RISK MANAGEMENT
The Company typically employs a strategy of purchasing put options on a
portion of its anticipated oil and gas production. This strategy is designed to
protect the Company from significant downward movements in commodity prices
while preserving the benefit of rising prices. The Company does not establish
hedges in excess of its anticipated production. Upon consummation of the
Offerings, substantially all of the Company's debt will be fixed rate. The
Company's current position with regard to its commodity hedges is as follows:
OIL SALES. The Company has purchased "put options" to provide a "floor
price" for 3,000 Bbls of oil per day of its oil production for August 1996
through December 1996. These put options currently in place represent
approximately 57% of the Company's estimated oil production for August 1996
through December 1996. The floor price the Company has an agreement to receive
is $18.00 per Bbl, irrespective of the prices actually paid by purchasers of the
oil at the lease level.
GAS SALES. The Company has purchased "put options" which provide a "floor
price" for 900,000 Mmbtu's per month of its gas production through October 1996.
The put options currently in place represent approximately 68% of the Company's
estimated gas production for July 1996 through October 1996. The floor prices
with respect to such put options varies from $1.65 to $1.75 per Mmbtu depending
on the area in which the gas is produced.
39
<PAGE>
OIL AND GAS RESERVES
The Company's estimated total proved and proved developed reserves of oil
and gas as of December 31, 1993, 1994 and 1995, and as of March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------ PRO FORMA
MARCH 31,
1993 1994 1995 1996 (1)
---------------------- -------------------- -------------------- --------------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
----------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed producing... 1,785 13,268 2,632 15,757 8,338 50,542 13,122 76,439
Proved developed non-
producing................... 0 0 0 583 228 6,851 429 7,930
Proved undeveloped........... 580 8,351 1,377 11,172 2,222 20,759 2,925 28,551
----- --------- --------- --------- --------- --------- --------- ---------
Total proved............... 2,365 21,619 4,009 27,512 10,788 78,152 16,476 112,920
----- --------- --------- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Assumes that the 1996 Acquisition had been consummated at March 31, 1996.
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------------------- MARCH 31,
1993 1994 1995 1996(1)
--------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future net cash flows before income taxes....................... $ 47,213 $ 68,596 $ 188,337 $ 297,002
Future net cash flows before income taxes, discounted at 10%.... $ 26,377 $ 36,779 $ 113,296 $ 179,527
</TABLE>
- ------------------------------
(1) Assumes that the 1996 Acquisition had been consummated at March 31, 1996.
The reserve estimates reflected above for 1993, 1994 and 1995 were prepared
by the Company. The Company's 1995 estimates of gross reserves with respect to
certain of the Company's producing properties were subject to a limited review
by Williamson. The pro forma estimates for March 31, 1996, including the
properties acquired in the 1996 Acquisition, were prepared by Williamson and are
part of reports on the Company's oil and gas properties prepared by Williamson,
a summary of which is set forth herein as Appendix A.
The reserve data set forth herein present estimates only. In general,
estimates of economically recoverable oil and gas reserves and of the future net
revenues therefrom are based upon an number of variable factors and assumptions,
such as historical production from the subject properties, the assumed effects
of regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company therefore emphasizes that the actual production, revenues, severance
and excise taxes, development and operating expenditures with respect to its
reserves will likely vary from such estimates, and such variances could be
material.
Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
40
<PAGE>
In accordance with applicable requirements of the Securities and Exchange
Commission, the estimated discounted future net revenues from estimated proved
reserves are based on prices and costs as of the date of the estimate unless
such prices or costs are contractually determined at such date. Actual future
prices and costs may be materially higher or lower. Actual future net revenues
also will be affected by factors such as actual production, supply and demand
for oil and natural gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated. At March 31, 1996, the Company was
in the process of drilling one gross (0.50 net) well and was in the process of
completing three gross (1.32 net) wells as producers which are not reflected in
the following table.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- ----------------------
GROSS NET GROSS NET GROSS NET
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive....................................... 3 0.83 9 2.27 10 4.58
Dry.............................................. 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total.......................................... 5 1.89 19 6.00 16 7.15
--- --- --- --- --- ---
--- --- --- --- --- ---
Development:
Productive....................................... -- -- -- -- 1 0.44
Dry.............................................. -- -- -- -- -- --
--- --- --- --- --- ---
Total.......................................... -- -- -- -- 1 0.44
--- --- --- --- --- ---
--- --- --- --- --- ---
Total:
Productive....................................... 3 0.83 9 2.27 11 5.02
Dry.............................................. 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total.......................................... 5 1.89 19 6.00 17 7.59
--- --- --- --- --- ---
--- --- --- --- --- ---
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
----------------------
GROSS NET
----------- ---------
<S> <C> <C>
Exploratory:
Productive....................................... 3 2.02
Dry.............................................. 1 0.72
--- ---
Total.......................................... 4 2.74
--- ---
--- ---
Development:
Productive....................................... 4 1.98
Dry.............................................. -- --
--- ---
Total.......................................... 4 1.98
--- ---
--- ---
Total:
Productive....................................... 7 4.00
Dry.............................................. 1 0.72
--- ---
Total.......................................... 8 4.72
--- ---
--- ---
</TABLE>
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors under standard drilling
contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are producing
wells and wells capable of production.
<TABLE>
<CAPTION>
ACTUAL (1)
--------------------
GROSS NET
--------- ---------
<S> <C> <C>
Oil wells...................................................................................... 2,245 678.54
Gas wells...................................................................................... 1,277 231.11
--------- ---------
Total...................................................................................... 3,522 909.65
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Does not include royalty and overriding royalty interests owned by
Statewide or the Company. See "-- Other Activities -- Minerals Acquisition
Program." In addition, one well with multiple completions is counted as a
single well.
41
<PAGE>
ACREAGE
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of March 31, 1996. Acreage in
which the Company's interest is limited to royalty, overriding royalty, mineral
and similar interests (such as all acreage owned by Statewide) is excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL (1)
-------------------- -------------------- --------------------
GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin................................. 27,049 23,489 52,903 42,250 79,951 65,742
Gulf Coast.................................... 34,324 29,746 28,457 19,958 62,781 49,703
Rocky Mountain................................ 8,967 8,676 47,510 40,799 56,477 49,453
Other......................................... 13,439 12,492 34,183 28,225 47,623 40,717
--------- --------- --------- --------- --------- ---------
Total..................................... 83,779 74,403 163,053 131,212 246,832 205,615
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) In the 1996 Acquisition, the Company acquired an additional 292,146 gross
(73,528 net) developed acres and 42,855 gross (10,172 net) undeveloped
acres.
OTHER ACTIVITIES
MOLDOVA CONCESSION AGREEMENT. In July 1995, the Republic of Moldova
(located in Eastern Europe between Romania and the Ukraine) granted a Concession
Agreement to Resource Development Company Limited, L.L.C. ("Redeco"), an entity
not affiliated with the Company. The Company has paid Redeco $90,000 and agreed
to bear the first $2.0 million of Concession expenses ($882,000 of which had
been expended through March 31, 1996) in return for a 50.0% interest in the
Concession. After the initial $2.0 million expenditure, Redeco and the Company
are responsible for bearing 50.0% each of future expenses. The Company will
serve as operator with respect to all activities undertaken pursuant to the
Concession. The Concession Agreement covers the entire country with respect to
oil and gas and other minerals and continues for various time periods depending
on the nature of the activity conducted. In connection with two previously
producing but now abandoned fields, the Company's exclusive rights continue for
20 years. The Company's exclusive period to explore throughout the remainder of
Moldova expires in 2005, but the Company will maintain exclusive development
rights with respect to fields discovered for a period of 20 years from the date
of first production from such field. The Company has no fixed financial
commitments with respect to the Concession.
MINERALS ACQUISITION PROGRAM. Statewide, a Company subsidiary, was
organized for the purpose of acquiring overriding royalty interests and other
types of non cost-bearing mineral interests underlying producing oil and gas
fields primarily in Texas. The strategy of such acquisitions is to make blanket
offers to holders of small interests. From inception through March 31, 1996,
Statewide expended approximately $2.9 million in acquiring interests in
approximately 1,400 properties. Through March 31, 1996, Statewide had received
revenues from such interests aggregating approximately $1.2 million, as well as
proceeds from sales of such interests of approximately $150,000.
GAS GATHERING AND TRANSMISSION. In 1996, the Company purchased a 45.0%
membership interest (which reduces to 32.4% when the Company and certain other
members recoup their original investment) in Republic Gas Partners, L.L.C., a
Texas limited liability company ("Republic"), for approximately $800,000.
Republic owns all of the stock of Mid Louisiana Gas Company, Mid Louisiana
Marketing Company and Mid Louisiana Gas Transmission Company (collectively, the
"Midla Companies"). The assets of the Midla Companies include 409 miles of
mainly 22-inch pipeline extending from the Monroe field area south of the city
of Baton Rouge, serving various Louisiana and Mississippi municipal and
industrial customers along its route. Mid Louisiana Gas Company's pipeline is
subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC").
Valley, a Company subsidiary, owns a small gas gathering system, several
small gas plants, 11 salt water disposal wells located in each of its three
principal regions and compressors used in the
42
<PAGE>
compression of gas located in the Gulf Coast region. For the year ended December
31, 1995, Valley had revenues of $553,000 and net income of $264,000,
substantially all of which were related to transactions with Costilla.
In the 1996 Acquisition, Pipeline, a Company subsidiary, acquired a 120-mile
gas transportation pipeline in southwestern Pennsylvania for an allocated value
of $3.5 million. The Company regards this asset as non-strategic to its business
activities and is presently marketing the pipeline for sale.
COMPETITION AND MARKETS
Competition in all areas of the Company's operations is intense. Major and
independent oil and gas companies and oil and gas syndicates actively bid for
desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. A number of the Company's
competitors have financial resources and acquisition, exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies. Many of the Company's competitors have been engaged in the energy
business for a much longer time than the Company. Such companies may be able to
pay more for productive oil and gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be dependent on its ability to evaluate and select suitable properties and
to consummate transactions in a highly competitive environment.
The market for oil, gas and natural gas liquids produced by the Company
depends on factors beyond its control, including domestic and foreign political
conditions, the overall level of supply of and demand for oil, gas and natural
gas liquids, the price of imports of oil and gas, weather conditions, the price
and availability of alternative fuels, the proximity and capacity of gas
pipelines and other transportation facilities and overall economic conditions.
The oil and gas industry as a whole also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.
REGULATION
The Company's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of certain states limit the rate at which oil and gas can be
produced from the Company's properties.
FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of gas produced by the Company, as well
as the revenues received by the Company for sales of such production. Since the
mid-1980s, the FERC has issued a series of orders, culminating in Order Nos.
636, 636-A and 636-B ("Order 636"), that have significantly altered the
marketing and transportation of gas. Order 636 mandates a fundamental
restructuring of interstate pipeline sales and transportation service, including
the unbundling by interstate pipelines of the sales, transportation, storage and
other components of the city-gate sales services such pipelines previously
performed. One of the FERC's purposes in issuing the orders is to increase
competition within all phases of the gas industry. Order 636 and subsequent FERC
orders on rehearing have been appealed and are
43
<PAGE>
pending judicial review. Because these orders may be modified as a result of the
appeals, it is difficult to predict the ultimate impact of the orders on the
Company and its gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of natural gas, and has substantially increased competition and volatility in
natural gas markets. While significant regulatory uncertainty remains, Order 636
may ultimately enhance the Company's ability to market and transport its gas,
although it may also subject the Company to greater competition and the more
restrictive pipeline imbalance tolerances and greater associated penalties for
violation of such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which, generally,
would index such rates to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting oil and
natural gas liquids by pipeline, although the most recent adjustment generally
decreased rates. These regulations are subject to pending petitions for judicial
review. The Company is not able to predict with certainty what effect, if any,
these regulations will have on it, but, other factors being equal, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
Operations of the Company are subject to numerous and constantly changing
federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of certain
permits, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment in connection with drilling
and production, restrict or prohibit drilling activities that could impact
wetlands, endangered or threatened species or other protected natural resources
and impose substantial liabilities for pollution resulting from the Company's
operations. Such laws and regulations may substantially increase the cost of
exploring for, developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the cost of compliance with such laws
and regulations has not been material and is not expected to be material during
the next fiscal year. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
For instance, legislation has been proposed in Congress from time to time that
would reclassify certain oil and gas production wastes as "hazardous wastes,"
which reclassification would make exploration and production wastes subject to
much more stringent handling, disposal and clean-up requirements. State
initiatives to further regulate the disposal of oil and gas wastes and naturally
occurring radioactive materials are also pending in certain states, including
Texas, and these various initiatives could have a similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
found at the site and persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
person injury and property damage allegedly caused by the hazardous substances
released into the environment. The Company is able to control directly the
operation of
44
<PAGE>
only those wells with respect to which its acts as operator. Notwithstanding the
Company's lack of control over wells operated by others, the failure of the
operator to comply with applicable environmental regulations may, in certain
circumstances, be attributed to the Company. The Company has no material
commitments for capital expenditures to comply with existing environmental
requirements.
EMPLOYEES
At June 30, 1996, the Company had 109 full-time employees. None of the
Company's employees is subject to a collective bargaining agreement. The Company
considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is a defendant or codefendant in minor lawsuits that have arisen
in the ordinary course of business. While the outcome of the these lawsuits
cannot be predicted with certainty, management does not expect any of these to
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
TITLE TO PROPERTIES
The Company has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring undeveloped properties. A title
opinion is obtained prior to the commencement of drilling operations on such
properties. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. Substantially all of the Company's oil
and gas properties are mortgaged to secure borrowings under the Company's
Existing Debt Facility and will continue to be mortgaged to secure borrowings
under the Credit Facility. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources," and "Description of Other Indebtedness."
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the hazards and risks inherent in
drilling and production and transportation of oil and gas, including fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury or loss of life,
severe damage to and destruction of properties of the Company and others, and
suspension of operations. See "Risk Factors -- Drilling Risks" and "Risk Factors
- -- Operating Hazards and Uninsured Risks."
The Company maintains insurance of various types to cover its operations.
The limits provided under its liability policies total $6 million. In addition,
the Company maintains operator's extra expense coverage which provides for care,
custody and control of all material wells drilled by the Company as operator.
The Company believes that its insurance is adequate and customary for companies
of a similar size engaged in operations similar to those of the Company, but
losses could occur for uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The Company's general policy is to only engage
drilling contractors who provide substantial insurance coverage and name the
Company as an additional named insured. The occurrence of a significant adverse
event, the risks of which are not fully covered by insurance, could have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, no assurances can be given that the Company will be able
to maintain adequate insurance in the future at rates it considers reasonable.
45
<PAGE>
MANAGEMENT
The executive officers and directors of the Company following completion of
the Corporate Reorganization are listed below, together with a description of
their experience and certain other information (ages provided are as of June 30,
1996). Each of the directors serve for a one year term. Executive officers are
appointed by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE EMPLOYED SINCE POSITION WITH COMPANY
- --------------------------- --- ----------------- --------------------------------------------------------------
<S> <C> <C> <C>
Cadell S. Liedtke 41 1988 Chairman of the Board, Chief Executive Officer and Director
Michael J. Grella 47 1988 President, Chief Operating Officer and Director
Henry G. Musselman 42 1992 Executive Vice President and Director
Jerry J. Langdon 43 n/a Director
W.D. Kennedy 76 n/a Director
Bobby W. Page 53 1996 Senior Vice President, Treasurer and Chief Financial Officer
Clifford N. Hair, Jr. 49 1992 Vice President -- Land and Secretary
Roger J. Wetz 47 1992 Vice President -- Exploration (Geology)
Roger A. Freidline 46 1993 Vice President -- Exploration (Geophysics)
Brian K. Miller 36 1992 Vice President -- Reservoir Engineering
Sal J. Pagano 45 1995 Vice President -- Engineering and Operations
Keith Atwood 42 1992 Vice President -- Field Operations
Celia A. Zinn 48 1996 Controller
</TABLE>
Cadell S. Liedtke entered the oil and gas business in Midland, Texas in 1977
as an independent landman generating oil and gas prospects in the Permian Basin.
He founded the Company's predecessor with Michael J. Grella in 1988 and has
served as managing partner and/or chief executive officer since that time. Mr.
Liedtke has served on the Board of Directors of Texas Commerce Bank-Permian
Basin and has been appointed by Texas Governor George W. Bush to the Oil and Gas
Compact Commission. Mr. Liedtke is a member of the All-American Wildcatters
Association, the Permian Basin Petroleum Association, the Permian Basin Landmans
Association and the Independent Producer's Association of America. Mr. Liedtke
graduated from the University of Texas at Austin in 1977 with a B.A. degree in
economics.
Michael J. Grella has served as Chief Operating Officer of the Company and
its predecessor entities since their formation in 1988. He owned and operated an
independent oil and gas company and has invested in the oil and gas business
since 1982. Mr. Grella is a member of the Permian Basin Petroleum Association
and the Independent Producer's Association of America. Mr. Grella has a B.S.
degree in computer science from the University of California.
Henry G. Musselman began his oil and gas career in 1975 with Musselman
Petroleum and Land Company where he served as Vice President and a Director
until forming Musselman, Owen & King in 1982. For the 10 years until merging his
company into Costilla's predecessor in 1992, Mr. Musselman developed and
acquired oil and gas properties throughout the Permian Basin. Mr. Musselman is a
member and prior director of the Independent Producer's Association of America.
Mr. Musselman graduated from the University of Texas at Austin in 1975 with a
B.B.A. degree.
Jerry J. Langdon has previously held positions with WP Corporation, Houston
Pipeline Company, Texas Oil & Gas Corporation and W. Wilson Corporation. In
1980, Mr. Langdon formed Texas IntraMark Gas Company, Inc., an intrastate gas
gathering company engaging in the business of constructing and operating natural
gas gathering, treating and processing facilities. In 1984, Mr. Langdon formed
Langdon & Associates, a natural gas consulting group advising petroleum
resource-oriented companies, financial institutions and law firms on a variety
of technical, commercial and regulatory
46
<PAGE>
issues. Mr. Langdon served as a member of the FERC from 1988 to June 1993. Since
leaving the FERC, Mr. Langdon formed Republic Gas Corp. to acquire, construct
and operate intrastate natural gas pipeline, gathering, processing, treating and
marketing facilities. Mr. Langdon is the President of both Republic and the
Midla Companies. Mr. Langdon is a 1975 graduate of the University of Texas at
Austin with a B.S. degree.
W. D. Kennedy has been continually involved in the oil and gas business
since 1948. From 1953 until 1980, Mr. Kennedy was an executive officer and
director of C&K Petroleum, Inc., and its predecessor. C&K Petroleum, Inc. was a
publicly held corporation from 1971 until 1980, when the company was sold for in
excess of $200 million. Mr. Kennedy remains an active investor in the oil and
gas business. Mr. Kennedy is a graduate of the University of Texas, and a member
of the All-American Wildcatters Association, a past president of the Permian
Basin Petroleum Association, a former director of the Texas Mid-Continent Oil
and Gas Association, and an advisory director of Norwest Bank Texas, Midland.
Bobby W. Page began his oil and gas career with MGF Oil Corporation in 1967,
where he remained until 1988, ultimately serving as Executive Vice President,
Chief Financial Officer and a member of the Board of Directors. Following two
years as a self-employed financial consultant, Mr. Page joined Alta Energy
Corporation in 1990 as Executive Vice President, Treasurer and Chief Financial
Officer. From July 1993 until joining the Company, Mr. Page served as Vice
President, Chief Financial Officer and Secretary of Marcum Natural Gas Services,
Inc. Mr. Page graduated from the University of Oklahoma with a B.B.A. degree in
accounting in 1965.
Clifford N. Hair, Jr. has served in district and division landman roles, as
well as a corporate officer with Texas Gas Exploration Corporation, Samedan Oil
Corporation, Henry Petroleum Corporation and Donald C. Slawson Oil Producer. For
the two year period prior to joining the Company in 1992, Mr. Hair was an
independent landman involved in drilling projects in Texas and Oklahoma. Mr.
Hair is a Certified Petroleum Landman's and a member of the American Association
of Petroleum Landmen and the Petroleum Basin Landman Association. Mr. Hair
graduated with honors from the University of Houston in 1971 with a B.B.A.
degree in accounting.
Roger J. Wetz began his oil and gas career with IMCO Services, a division of
Halliburton, Inc. in 1974. He held a variety of geological positions with Gulf
Energy & Minerals Company, TXO Production Corporation and Terra Resources, Inc.
from 1976 to 1989. From 1989 until joining the Company in 1992, Mr. Wetz was an
independent geologist generating prospects in the Permian Basin. Mr. Wetz
graduated from St. Mary's University in 1973 with a B.S. degree in geology.
Roger A. Freidline began his industry career with Union Oil Company of
California. From 1976 until 1985, Mr. Freidline served in various geophysical
capacities with Forest Oil Corporation, Gifford, Mitchell and Wisenbaker and
Heritage Resources, Inc. Mr. Freidline was an independent geophysicist from 1985
until joining the Company, except for a period of employment as district
geologist for Hondo Oil & Gas Company prior to its sale. Mr. Freidline is a
Certified Petroleum Geologist, and a member of the Society of Exploration
Geophysicists, the Permian Basin Geophysical Society and the West Texas
Geological Society. He has co-authored papers which have appeared in Geology and
The Bulletin of the Seismological Society of America. Mr. Freidline received a
B.S. degree with highest honors from the New Mexico Institute of Mining and
Technology in 1972 and a Masters of Science degree in geophysics from the
University of Utah in 1974.
Brian K. Miller entered the oil and gas business as an operations engineer
for ARCO Oil and Gas Company. From 1984 to 1987, he was a reservoir engineer
with First City National Bank of Midland, Texas, and from 1987 to 1989, Mr.
Miller was an independent consulting engineer. Prior to joining the Company in
1992, Mr. Miller served as an oil and gas analyst under appointment to the
Federal Deposit Insurance Corporation. Mr. Miller is a member of the Society of
Petroleum Engineers. Mr. Miller received a B.S. degree with highest honors in
petroleum engineering from the University of Texas at Austin in 1982 and a
Master of Business Administration degree with honors in finance in 1984.
47
<PAGE>
Sal J. Pagano began his oil and gas career with Amoco Production Company
where he was employed until 1978. From 1978 through 1989, Mr. Pagano was
employed by several independent oil and gas companies in Midland, Texas in a
variety of petroleum engineering capacities. Prior to joining the Company in
1995, Mr. Pagano was employed by Midland Resources Company from 1989 as a vice
president. Mr. Pagano is a registered petroleum engineer and a member of the
Society of Petroleum Engineers. Mr. Pagano graduated in 1973 from the University
of Missouri at Rolla with a B.S. degree in petroleum engineering.
Keith Atwood began his oil and gas career with Otis Engineering Corp. in
1974. Mr. Atwood worked as an independent consultant from 1979 to 1983 when he
joined Musselman, Owen & King Operating Co. to manage field operations. He
served in that capacity until joining the Company in 1992. Mr. Atwood attended
Southwest Texas State University and the University of Texas.
Celia A. Zinn joined the Company in 1996. From 1992 to 1996, she practiced
public accounting in Midland. Ms. Zinn has 18 years experience in the oil and
gas industry, including 12 years as Controller for Clayton W. Williams, Jr.,
Inc. from 1981 to 1992. Ms. Zinn is a certified public accountant. Ms. Zinn
graduated from the University of Texas-Arlington in 1978 with a B.A. in
mathematics.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and addresses of each of the
Company's stockholders who beneficially own more than five percent of the
Company's Common Stock, the number of shares beneficially owned by such
shareholders and the percentage of the Common Stock so owned at June 30, 1996,
assuming in each case the Corporate Reorganization had been consummated at June
30, 1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) CLASS
- -------------------------------------- ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke .................... 2,656,796 26.6%
400 W. Illinois
Midland, Texas 79701
Michael J. Grella .................... 1,558,161 15.6%
400 W. Illinois
Midland, Texas 79701
NationsBanc Capital Corp. ............ 1,080,008 10.8%
100 North Tryon Street
Charlotte, North Carolina 28255
Henry G. Musselman ................... 705,035 7.0%
400 W. Illinois
Midland, Texas 79701
</TABLE>
- ------------------------------
(1) Unless otherwise indicated, all persons own the listed shares of record.
The following table sets forth information as of June 30, 1996 (assuming the
Corporate Reorganization had been consummated on such date) with respect to the
shares of Common Stock beneficially owned by each of the Company's Directors,
the Chief Executive Officer and the three other most highly compensated
executive officers for 1996 (whose annualized compensation for such year based
on compensation levels following the Offering is expected to exceed $100,000)
and all Directors and executive officers as a group and the percent of the
outstanding Common Stock owned by each.
<TABLE>
<CAPTION>
DIRECTORS AND NAMED AMOUNT AND NATURE OF PERCENT OF
EXECUTIVE OFFICER BENEFICIAL OWNERSHIP CLASS (1)
- -------------------------------------- ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke..................... 2,656,796 26.6%
Michael J. Grella..................... 1,558,161 15.6%
Henry G. Musselman.................... 705,035 7.0%
Bobby W. Page......................... 75,000(2) 0.7%
All Officers and Directors as a group
(13 persons).......................... 4,994,992(2) 49.6%
</TABLE>
- ------------------------------
(1) For the sole purpose of calculating these percentages, the shares, which
the named person has the right to acquire within 60 days, by exercise of
the options described in these footnotes, are deemed outstanding shares
with respect to that person's percentage ownership and with respect to the
percentage ownership of all Officers and Directors as a group.
(2) Includes 75,000 shares issuable pursuant to options under the Company's
1996 Stock Option Plan which options will be immediately exercisable upon
closing of the Offerings at a price equal to the initial public offering
price of the Common Stock.
49
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the Company's Chief Executive
Officer and the three other most highly compensated executive officers whose
annual compensation for the fiscal year ending December 31, 1996 is expected to
exceed $100,000. Information is presented for 1995, and for 1996 on an
annualized basis based on salaries to be effective following consummation of the
Offerings. Information for 1994 and prior years is not comparable since the
Company's predecessor was a general partnership in which the partners received
periodic partnership distributions in lieu of salary.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARS(#)(2) COMPENSATION($)
- ------------------------------- --------- --------- --------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Cadell S. Liedtke
Chairman of the Board and 1995 185,700 -- -- -- --
Chief Executive Officer 1996 300,000 -- -- -- --
Michael J. Grella
President and Chief Operating 1995 261,750 -- -- -- --
Officer 1996 300,000 -- -- -- --
Henry G. Musselman
1995 139,800 -- -- -- --
Executive Vice President 1996 215,000 -- -- -- --
Bobby W. Page
Senior Vice President,
Treasurer and Chief 1995(1) -- -- -- -- --
Financial Officer 1996 150,000 -- -- 75,000 --
</TABLE>
- ------------------------------
(1) Mr. Page joined the Company in June 1996.
(2) The amount shown represents the number of shares subject to a stock option
to be granted upon the closing of the Offerings pursuant to the Company's
1996 Stock Option Plan described under "-- Benefit Plans -- 1996 Stock
Option Plan." The option will be granted with an exercise price per share
equal to the initial public offering price of the Common Stock and will be
granted for a 10-year term.
DIRECTORS' COMPENSATION
Compensation for non-employee directors (Messrs. Langdon and Kennedy) will
consist of an annual retainer fee of $10,000, plus a $1,000 fee for each Board
meeting attended and a $1,000 fee for attending a committee meeting held on a
day other than the same day of a Board meeting. In addition, outside Directors
are participants in the Company's Outside Directors Stock Option Plan described
under "-- Benefit Plans -- Outside Directors Stock Option Plan." Employee
Directors do not receive compensation for serving on the Board or the Board's
committees.
EMPLOYMENT AGREEMENTS
Messrs. Liedtke, Grella and Musselman have entered into employment
agreements (the "Founders Employment Agreements") with the Company which will
become effective upon the closing of the Offerings and replace certain existing
agreements. The Founders Employment Agreements are each for three years,
commencing on the closing of the Offerings and each will automatically renew for
successive one-year periods thereafter unless the employee is notified to the
contrary thereafter. The Founders Employment Agreements provide for salary
levels for Messrs. Liedtke, Grella and Musselman of $300,000, $300,000 and
$215,000, respectively.
Each of Messrs. Liedtke, Grella and Musselman would receive his salary for
the remaining term of the applicable Founders Employment Agreement if the
Company were to terminate such person's
50
<PAGE>
employment other than for cause. However, if such person were to voluntarily
leave his employment with the Company, no further payments would be required.
Each Founders Employment Agreement provides that the covered employee will not
compete with the Company for a one year period following his voluntary cessation
of employment or termination of employment for cause. Competitive activities are
defined as engaging in the oil and gas business in any area in which the Company
is then active.
Bobby W. Page has entered into an employment agreement (the "Page Employment
Agreement") with the Company effective June 30, 1996. The Page Employment
Agreement is for a period of three years from June 30, 1996 and will
automatically renew for successive one-year periods thereafter unless Mr. Page
is notified to the contrary by the Company. The Page Employment Agreement
provides a $25,000 bonus (which includes Mr. Page's cost of relocation), plus a
base salary of $150,000 until January 1, 1997; $175,000 until January 1, 1998;
and $185,000 thereafter. In addition, Mr. Page will receive options to purchase
75,000 shares of Common Stock, certain insurance benefits and other benefits
generally available to the Company's employees. Mr. Page would receive his
salary for the remaining term of the Page Employment Agreement if the Company
were to terminate the Page Employment Agreement other than for cause. However,
if Mr. Page were to voluntarily leave his employment with the Company, no
further payments would be required.
BENEFIT PLANS
OUTSIDE DIRECTORS STOCK OPTION PLAN. The Outside Directors Stock Option
Plan provides for the issuance of stock options to the outside directors of the
Company. A total of shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustments to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends and
similar events. Only outside directors are eligible to participate in the plan.
Outside directors are those directors of the Company who are not executive
officers or regular salaried employees of the Company as of the date an option
is granted. Under the plan, an option for shares of Common Stock will be
granted to each person who qualifies as an outside director as of the effective
date of the plan and each year thereafter that such person is elected as a
director of the Company. The exercise price of each option granted under the
plan will be the fair market value (as reported on the Nasdaq National Market)
of the Common Stock at the time the option is granted, and may be paid either in
cash or shares of Common Stock. Each option will be exercisable immediately, and
will expire ten years from the date of grant. An option granted under the plan
is not transferrable other than by will or the laws of descent and distribution.
In the event a participant in the plan ceases to be an outside director, other
than by reason of death or change of control of the Company, such participant
may exercise an outstanding option under the plan within ninety days after such
termination, to the extent the participant was entitled to exercise the option
on the date of termination. In the event of the death of a participant under the
plan, such participant's option(s) may be exercised by the executors or
administrators of the optionee's estate or by the legatees of such participant
within one year after his death, so long as the term of the option has not
expired. The Company does not receive any consideration upon the grant of
options under the plan. The options granted under the plan are intended to be
non-qualifying options for federal income tax purposes. Because options under
the plan are not generally transferrable, do not appear to be subject to a
substantial risk of forfeiture and the exercise price will be the fair market
value of the common stock on the date of grant, the options should not be
taxable to an optionee until the optionee exercises the option, at which time
the optionee would recognize income on the difference between the exercise price
and the fair market value of the shares on the date of exercise. The grant of
options under the plan should be treated as compensation paid by the Company for
purposes of the Company's federal income tax considerations. The Board of
Directors may amend the plan without the approval of the stockholders of the
Company in any respect other than the following, which require stockholder
approval: material increases in the number of shares which may be awarded under
the plan, material increases in the benefits accruing to participants under the
plan, material modifications of the requirements for eligibility for
participation in the plan, or any other amendment which requires stockholder
approval by law. The Company currently has five directors, two of whom are
eligible to participate in the plan.
51
<PAGE>
1996 STOCK OPTION PLAN. The 1996 Employee Stock Option Plan provides for
the grant of qualified stock options to the employees of the Company and its
subsidiaries, including officers and directors who are salaried employees. A
total of shares of Common Stock has been authorized and reserved for
issuance under the plan, subject to adjustment to reflect changes in the
Company's capitalization resulting from stock splits, stock dividends and
similar events. The plan is administered by the Employee Plan Committee, which
consists of not less than two and not more than four directors who are not
eligible to participate in the plan. The Committee has the sole authority to
interpret the plan, to determine the persons to whom options will be granted, to
determine the basis upon which the options will be granted, and to determine the
exercise price, duration and other terms of the options to be granted under the
plan; provided that (a) the exercise price of each option granted under the plan
may not be less than the fair market value of the Common Stock on the date the
option is granted (110% of fair market value if the employee is the beneficial
owner of 10% or more of the Company's voting securities), (b) the exercise price
must be paid in cash or by surrendering previously owned shares of Common Stock
upon the exercise of the option, (c) the term of the option may not exceed ten
years, and (d) no option is transferrable other than by will or the laws of
descent and distribution. Upon termination of an optionee's employment (other
than by death or disability), the option may be exercised prior to the
expiration date of the option or within three months after the date of such
termination, whichever is earlier, but only to the extent the optionee had the
right to exercise the option upon the date of such termination. In the event of
the death or disability of an optionee, the option may be exercised by such
person, his guardian, legatee or personal representative at any time prior to
the expiration date of the option, but only to the extent the optionee had the
right to exercise the option as of the date of his death or disability. Options
may not be granted under the plan to any individual if the effect of such grant
would permit that person to have the first opportunity to exercise such options,
in any calendar year, for the purchase of shares having a fair market value (at
the time of grant of the option) in excess of $100,000. Neither the Company nor
any of its subsidiaries will receive any consideration for the granting of
options under the plan. Options granted under the plan are intended to have the
federal income tax consequences of a qualified stock option. As a result, the
exercise of the option will not be a taxable event; the taxable event occurs at
the time the shares of Common Stock acquired upon exercise of the option are
sold. If the optionee holds such shares for the later of two years from the date
the option was granted or one year from the date of exercise of the option, the
difference between the price paid for the shares at exercise and the price for
which those shares are sold will be treated as capital gains income. If the
optionee does not hold the shares for the required holding period, the income
would be treated as ordinary income rather than capital gains income. The grant
of options under the plan will be treated as compensation by the Company for
federal income tax purposes. The Board of Directors may amend the plan, without
stockholder approval, in any respect other than the following, which will
require stockholder approval: increasing the total number of shares for which
options may be granted under the plan, changing the minimum exercise price,
affecting outstanding options or the unexercised rights thereunder, extending
the option period, or extending the termination date of the plan. There are
currently approximately 100 persons who are eligible to participate under the
plan.
CERTAIN TRANSACTIONS
A&P supplies meter reading services which measures gas production to the
Company, as well as to unaffiliated oil and gas companies. A&P is also engaged
in the sale of gas meter and regulating equipment, and in certain other oil
field related businesses. For the fiscal year ended December 31, 1995, the
Company accounted for approximately 27% of A&P's gross revenues. From time to
time, the Company has advanced funds to A&P for working capital needs. These
advances have been consolidated into two promissory notes. One note was executed
December 31, 1994 in the original principal amount of $370,000. The note bears
interest at a floating rate equal to the "prime rate" plus 1.0%. No principal or
interest payments are due until the maturity of the note at December 31, 2004.
The note is secured by a second lien on A&P's accounts receivable, inventory and
equipment. The second note is in the original principal amount of $247,000 and
is dated May 22, 1996. The note bears interest at
52
<PAGE>
6.0% per annum, is unsecured and is payable upon demand. During the fiscal year
ended December 31, 1995, A&P received $612,139 from the Company for meter
reading, meter repair, calibration, flow line installation and other related
services provided to the Company. The Company believes that the services and
charges therefor are comparable to those the Company could have obtained from
unaffiliated third parties.
During 1994 and 1995, the Company paid $2,458 and $440,884, respectively, to
Valley for gas compression and salt water disposal charges. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal wells
and gas compressors. Also during 1995, the Company paid CSL $592,920 for
management fees and lease payments on equipment.
During a portion of 1995, the Company leased office space from 511 Tex.,
L.C., in which Messrs. Liedtke, Grella and Musselman are the sole members. The
amount of rental payments to 511 Tex, L.C. during 1995 was $67,896. The Company
no longer leases office space from any affiliated party.
The Company has agreed that, upon the request of NBCC, on up to two
occasions, the Company will register under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws the sale of
the Common Stock owned by NBCC. The Company's obligation is subject to certain
limitations regarding the timing of registrations and certain other matters. The
Company is also obligated to offer to NBCC and Messrs. Liedtke, Grella and
Musselman (collectively, the "Affiliated Holders") the opportunity to include
shares of the Common Stock owned by them in certain registration statements
filed by the Company. In addition, the Company has agreed to indemnify the
Affiliated Holders and their respective officers and directors against
securities law liabilities arising in connection with such offerings, other than
liabilities arising as a result of information furnished to the Company by the
Affiliated Holders participating in the registration. The Company is obligated
to pay all expenses incident to such registration, except underwriters'
discounts and commissions allocable to the sale of shares by Affiliated Holders
and any professional fees and expenses incurred by the Affiliated Holders
incident to such registration. The Affiliated Holders have agreed that they will
not sell any shares of Common Stock for a period of 180 days after the Offerings
without the consent of Prudential Securities Incorporated.
Certain of the transactions comprising the Corporate Reorganization
represent transactions between the Company, or its predecessors, and its
affiliates. Messrs. Liedtke, Grella and Musselman, the shareholders of Valley
and CSL will sell the stock of Valley and the assets of CSL to the Company for
$0.7 million. The purchase price is based on negotiations between Messrs.
Liedtke, Grella and Musselman, on the one hand, and NBCC, considering the value
to the Company of the stock and assets being acquired. No third party conducted
an appraisal of either Valley or CSL.
In addition, Messrs. Liedtke, Grella and Musselman will receive an aggregate
distribution from the LLC of approximately $3.5 million which is estimated to be
the federal income tax liability (as well as the federal income tax liability on
such distribution) which will be owed by Messrs. Liedtke, Grella and Musselman
as a result of the Corporate Reorganization. However, the precise amount of such
liability will be dependent upon a number of factors which cannot be determined
with certainty until subsequent to December 31, 1996. While the amount to be
distributed has been determined in good faith by the Company's independent
accountants, there can be no assurance that the actual tax liability of any of
Messrs. Liedtke, Grella or Musselman will not be less or greater than the
distributed amounts. If the distributed amounts exceed the ultimate tax
liabilities, none of such persons will reimburse the Company. Correspondingly,
if the tax liability exceeds the amount of such distributions, the Company will
not make any further distributions to cover such short-fall. NBCC is also
receiving a distribution of $800,000 which represents its post-redemption
ownership percentage of the distribution made to Messrs. Liedtke, Grella and
Musselman. However, NBCC has no tax or other liability with respect to such
distribution.
53
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and State Street Bank and Trust Company, as trustee (the "Trustee").
A copy of the Indenture in substantially the form in which it will be executed
has been filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below and those terms that are made a
part of the Indenture by reference to the Trust Indenture Act. The definitions
of certain terms used in the following summary are set forth below under the
caption "Certain Definitions."
As of the date of the Indenture, Costilla Redeco Energy, L.L.C. and Costilla
Redeco Operating, L.L.C., through which the Company conducts its Moldovan
operations, will be Unrestricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate additional Subsidiaries as
Unrestricted Subsidiaries. If so designated, such Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture. As used
herein, "Subsidiary" refers to any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured senior subordinated general obligations of the
Company, limited in aggregate principal amount to $100 million and will mature
on , 2006. Interest on the Notes will accrue at the rate of
% per annum and will be payable semiannually in arrears on and
commencing on 1997, to Holders of record on the immediately
preceding and . Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from , 1996. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
on the Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; PROVIDED that all payments with respect to Global Notes and Certificated
Securities the Holders of which have given wire transfer instructions to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be in
the office of the Trustee maintained for such purpose. The Notes will be issued
in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of Senior Indebtedness, which will include borrowings under the
Credit Facility, whether outstanding on the date of the Indenture or thereafter
incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are paid in full in
cash, any distribution to which
54
<PAGE>
the Holders of Notes would be entitled shall be made to the holders of Senior
Indebtedness (except that Holders of Notes may receive securities that are
subordinated at least to the same extent as the Notes are subordinated to Senior
Indebtedness and any securities issued in exchange for Senior Indebtedness and
Holders of Notes may recover payments made from the trust described under the
caption "Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under the
caption "Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that then permits holders of such Designated Senior
Indebtedness to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the holders or the
representative of the holders of any Designated Senior Indebtedness. Payments on
the Notes may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in the case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage may be
commenced by a Payment Blockage Notice unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Indenture will further require that the Company promptly notify the
Representatives of holders of Designated Senior Indebtedness and Designated
Guarantor Senior Indebtedness if payment of the Notes is accelerated because of
any Event of Default.
As a result of the subordination provisions described above, in the event of
an insolvency, bankruptcy, reorganization or liquidation of the Company, or upon
the occurrence of a Change of Control or an Asset Sale requiring repurchase by
the Company of any Notes, there may not be sufficient assets remaining to
satisfy the claims of the Holders after satisfying the claims of creditors of
the Company who are holders of Senior Indebtedness and claims of creditors of
the Company's Subsidiaries. See "Risk Factors -- Subordination of the Notes and
Subsidiary Guarantees." On a pro forma basis, after giving effect to the 1996
Acquisition, the Corporate Reorganization, the Offerings and the application of
proceeds therefrom, no Senior Indebtedness of the Company would have been
outstanding at March 31, 1996. The Indenture will limit, subject to certain
financial tests, the amount of additional Indebtedness, including Senior
Indebtedness, that the Company and its Subsidiaries can incur. See "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by each Subsidiary of the
Company (the "Subsidiary Guarantors"). So long as a Person is an Unrestricted
Subsidiary, such Person will not be required to become a Subsidiary Guarantor or
execute a Subsidiary Guarantee. See "Certain Covenants -- Unrestricted
Subsidiaries." The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee will be limited in a manner intended to result in such Subsidiary
Guarantee not constituting a fraudulent conveyance under applicable law.
The Indenture will provide that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor (other than the consolidation or merger of a Wholly
Owned Subsidiary of the Company with another Wholly Owned Subsidiary of the
Company or into the Company) unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation or
merger (if other than such Subsidiary Guarantor) assumes all the obligations of
such Subsidiary Guarantor pursuant to a supplemental
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indenture in form and substance reasonably satisfactory to the Trustee, under
the Notes and the Indenture and (ii) immediately after giving effect to such
transaction, (A) no Default or Event of Default would exist or be continuing and
(B) other than in the case of the consolidation or merger of two or more
Subsidiary Guarantors or of one or more Subsidiary Guarantors with the Company,
the Company would (A) have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transactions; and (B) at the time of such transaction
and after giving effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Interest Coverage Ratio and
the Adjusted Consolidated Net Tangible Assets to Consolidated Indebtedness Ratio
tests set forth in the first paragraph of the covenant described below under the
caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Indenture will provide that (i) in the event of a sale or other
disposition of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Subsidiary Guarantor or (ii) in the event that a Subsidiary
Guarantor is properly designated as an Unrestricted Subsidiary, in each case, in
accordance with the provisions of the Indenture, then such Subsidiary Guarantor
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Subsidiary
Guarantor or the proper designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary in accordance with the provisions of the Indenture) or
the corporation acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Subsidiary
Guarantor), will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "Certain Covenants -- Merger, Consolidation or Sale of Assets."
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
are subordinated to the prior payment in full of all Guarantor Senior
Indebtedness of such Subsidiary Guarantor (including its guarantee of
Indebtedness of the Company under the Credit Facility) to substantially the same
extent as the Notes are subordinated to Senior Indebtedness. On a pro forma
basis, after giving effect to the 1996 Acquisition, the Corporate
Reorganization, the Offerings and the application of proceeds therefrom, no
Guarantor Senior Indebtedness of the Subsidiary Guarantors would have been
outstanding as of March 31, 1996.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to
, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest to the applicable
redemption date, if redeemed during the twelve-month period beginning on
of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. %
2002............................................................................. %
2003............................................................................. %
2004 and thereafter.............................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before , 1999,
the Company may (but shall not have the obligation to) redeem up to 30% of the
original aggregate principal amount of the Notes at a redemption price of %
of the principal amount thereof, plus accrued and unpaid interest thereon to the
redemption date, with the net proceeds of an Equity Offering made by the
Company; PROVIDED that at least 70% of the aggregate principal amount of Notes
originally issued remain outstanding immediately after the occurrence of such
redemption; and PROVIDED, FURTHER, that such redemption shall occur within 75
days of the date of the closing of such Equity Offering.
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If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions thereof called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon (the "Change of Control Purchase Price") to the date of
purchase (the "Change of Control Payment Date"). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice. The Change of Control Payment Date shall be a business
day not less than 30 days nor more than 60 days after such notice is mailed. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 30 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover by any
persons other than the Approved Shareholders, or a recapitalization or similar
restructuring.
The Credit Facility may provide that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements
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relating to Senior Indebtedness to which the Company becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when the Company is prohibited from purchasing Notes, the Company could
seek the consent of its lenders to the purchase of Notes or could attempt to
repay or refinance the borrowings that contain such prohibition. If the Company
does not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the Credit Facility. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or
such Subsidiary) receives consideration at the time of such Asset Sale at least
equal to the fair market value, and in the case of a lease of assets under which
the Company or any of its Subsidiaries is the lessor, a lease providing for rent
and other conditions which are no less favorable to the Company (or such
Subsidiary) in any material respect than the then prevailing market conditions
(evidenced in each case by a resolution of the Board of Directors of such entity
set forth in an Officers' Certificate delivered to the Trustee) of the assets
sold or otherwise disposed of, and (ii) at least 85% (100% in the case of such
lease payments) of the consideration therefor received by the Company or such
Subsidiary is in the form of cash or Cash Equivalents or properties used in the
Oil and Gas Business of the Company and its Subsidiaries.
The Company may apply Net Proceeds of an Asset Sale, at its option, (a) to
permanently reduce Senior Indebtedness other than Senior Revolving Indebtedness,
(b) to permanently reduce Senior Revolving Indebtedness (and to correspondingly
reduce commitments with respect thereto), or (c) to invest in properties and
assets that will be used in the Oil and Gas Business of the Company and its
Subsidiaries. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Senior Revolving Indebtedness or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied within 270 days after the
consummation of an Asset Sale as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $5.0 million, the Company will be required to
make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at a purchase price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate unpaid amount of Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use such surplus
Excess Proceeds for general corporate purposes. If the aggregate unpaid amount
of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
OWNERSHIP OF CAPITAL STOCK
The Indenture will provide that the Company will not permit any Person
(other than the Company or any Wholly Owned Subsidiary of the Company) to own
any Capital Stock of any Subsidiary of the Company or any lien or security
interest therein, and will not permit any Subsidiary of the Company to issue
Capital Stock (except to the Company or to a Wholly Owned Subsidiary) or create,
incur, assume or suffer to exist any lien or security interest therein, in each
case except (a) directors' qualifying shares, (b) Capital Stock issued prior to
the time such Person becomes a Subsidiary of the Company, (c) if such Subsidiary
merges with and into another Subsidiary, (d) if another Subsidiary merges with
and into such Subsidiary, (e) if such Subsidiary ceases to be a Subsidiary (as a
result of the sale of 100% of the shares of such Subsidiary, the Net Proceeds
from which are applied in accordance
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<PAGE>
with "Repurchase at the Option of Holders -- Asset Sales") or (f) Capital Stock
of a Subsidiary organized in a foreign jurisdiction required to be issued to, or
owned by, the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Subsidiary to transact
business in such foreign jurisdiction.
UNRESTRICTED SUBSIDIARIES
The Board of Directors of the Company may designate any of its Subsidiaries
as an Unrestricted Subsidiary. A Subsidiary may only be so designated if (i)
immediately after giving effect to such designation no Default or Event of
Default exists, (ii) the Company would, at the time of such designation and
after giving pro forma effect thereto as if such designation had occurred at the
beginning of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated Interest
Coverage Ratio and the Adjusted Consolidated Tangible Net Assets to Consolidated
Indebtedness Ratio tests set forth in the first paragraph of the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock," and (iii) after the date of the Indenture and prior to such
designation, no assets of the Company or of any Subsidiary of the Company
(including, without limitation, Capital Stock of any such Subsidiary) shall have
been transferred, directly or indirectly, to any Unrestricted Subsidiary or any
of its Subsidiaries, other than assets transferred in the ordinary course of
business and on terms that are no less favorable to the Company or the relevant
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Subsidiary with an unrelated Person and except to the
extent permitted under the caption "-- Restricted Payments." Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution of
the Company giving effect to such designation and an Officers' Certificate of
the Company certifying that such designation complied with the foregoing
conditions.
Any Subsidiary of the Company shall continue to be an Unrestricted
Subsidiary only if it (a) has no Indebtedness other than Non-Recourse
Indebtedness; (b) is a Person with respect to which neither the Company nor any
of its Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (c) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Subsidiaries. If, at any time, any Unrestricted Subsidiary fails to meet the
foregoing requirements, such Unrestricted Subsidiary shall thereafter cease to
be an Unrestricted Subsidiary for purposes of the Indenture, such Unrestricted
Subsidiary shall execute and deliver a supplemental indenture pursuant to which
such Person guarantees the payment of the Notes on the same terms and conditions
as the Subsidiary Guarantees and any Indebtedness of such Unrestricted
Subsidiary shall be deemed to be incurred by a Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant).
The Board of Directors of the Company may at any time designate any
Subsidiary, if previously designated as an Unrestricted Subsidiary, to be a
Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence
of Indebtedness by a Subsidiary of the Company of any outstanding Indebtedness
of such Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," (ii) no Default or
Event of Default would be in existence following such designation and (iii) such
Subsidiary shall execute and deliver a supplemental indenture pursuant to which
such Person guarantees the payment of the Notes on the same terms and conditions
as the Subsidiary Guarantees.
As of the date of the Indenture, Costilla Redeco Exploration, L.L.C. and
Costilla Redeco Operating, L.L.C., through which the Company conducts its
Moldovan operations will be Unrestricted Subsidiaries.
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<PAGE>
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Equity Interests, other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company; (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Subsidiary or Unrestricted Subsidiary or
other Affiliate of the Company (other than Equity Interests of the Company, any
Subsidiary or Unrestricted Subsidiary owned by any Wholly Owned Subsidiary of
the Company); (iii) make any principal payment on, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness of (x) the Company
that is PARI PASSU with or subordinated to the Notes (other than the Notes) or
(y) any Subsidiary of the Company that is PARI PASSU with or subordinated to
such Subsidiary's Subsidiary Guarantee (other than Indebtedness secured by such
Subsidiary Guarantee) ("PARI PASSU Indebtedness"), in each case, prior to a
scheduled mandatory sinking fund payment date or maturity date or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio and the Adjusted Consolidated Net
Tangible Assets to Consolidated Indebtedness Ratio tests set forth in the
first paragraph of the covenant described below under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries on or after the
date of the Indenture (excluding Restricted Payments permitted by clauses
(ii), (iii), (iv) and (v) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Company and its
Subsidiaries for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by the Company as capital contributions to the
Company or from the issue or sale after the date of the Indenture of Equity
Interests of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary or an Unrestricted
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock) other than the
Common Stock sold in the Common Stock Offering.
The foregoing clauses (b) and (c), however, will not prohibit (i) the
payment of any dividend within 60 days after the date of declaration thereof, if
at said date of declaration such payment would have complied with the provisions
of the Indenture; (ii) the payment of any dividend on Equity Interests of the
Company (other than Disqualified Stock) payable solely in shares of Equity
Interests of the Company (other than Disqualified Stock); (iii) any dividend or
other distribution payable from a Subsidiary of the Company to the Company or
any Wholly Owned Subsidiary; (iv) the making of any Restricted Investment in
exchange for, or out of the proceeds of, the substantially concurrent sale,
issuance or exchange (other than to a Subsidiary or any Unrestricted Subsidiary
of the Company) of Equity Interests of the Company (other than Disqualified
Stock); PROVIDED, that any net cash proceeds that are utilized for any such
Restricted Investment shall be excluded from clause (c) of the preceding
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paragraph; (v) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale, issuance or exchange (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); PROVIDED that any
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c) of the
preceding paragraph; and (vi) the defeasance, redemption or repurchase of PARI
PASSU Indebtedness prior to a scheduled mandatory sinking fund payment date or
maturity date thereof with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale, issuance or
exchange (other than to a Subsidiary or any Unrestricted Subsidiary of the
Company) of Equity Interests of the Company (other than Disqualified Stock) or
the purchase, redemption or acquisition of PARI PASSU Indebtedness prior to a
scheduled mandatory sinking fund payment date or maturity date thereof through
the issuance in exchange thereof of Equity Interests of the Company (other than
Disqualified Stock); PROVIDED, that any net cash proceeds that are utilized for
any such defeasance, redemption, repurchase, purchase or acquisition shall be
excluded from clause (c) of the preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate of the Company stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant described under the caption "-- Restricted Payments"
were computed, which calculations may be based upon the Company's latest
available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness) and that the Company will not
issue any Disqualified Stock and will not permit any of its Subsidiaries to
issue any shares of preferred stock; PROVIDED, HOWEVER, that the Company may
incur Indebtedness (including Acquired Indebtedness) and the Company may issue
shares of Disqualified Stock if: (i) the Consolidated Interest Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least, during the period until the first anniversary
of the date of the Indenture, 2.25 to 1, and, thereafter, 2.5 to 1, in each
case, determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period; (ii) the Adjusted Consolidated Net Tangible Assets
would have been at least 150% of Consolidated Indebtedness, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom)
and (iii) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; PROVIDED, that no Guarantee may be
incurred pursuant to this paragraph, unless the guaranteed Indebtedness is
incurred by the Company or a Subsidiary pursuant to this paragraph.
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The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Facility (and the incurrence by Subsidiaries of Guarantees thereof) in an
aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company and its Subsidiaries thereunder) not to exceed $50
million, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the outstanding amount or the commitments with
respect to such Indebtedness pursuant to the covenant described above under
the caption "-- Asset Sales";
(ii) the incurrence by the Company of Indebtedness represented by the
Notes and of its Subsidiaries of Indebtedness represented by the Subsidiary
Guarantees;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund, any
Indebtedness described in the foregoing clause (ii);
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries or between or among any Wholly Owned Subsidiaries;
PROVIDED that, in the case of Indebtedness of the Company, such obligations
shall be unsecured and subordinated in case of an event of default in all
respects to the Company's obligations pursuant to the Notes; and PROVIDED,
however, that (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than a
Wholly Owned Subsidiary and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(v) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the Indenture
to be incurred; PROVIDED that, the notional amount of such Hedging
Obligations does not exceed the principal amount of the Indebtedness to
which such Hedging Obligations relate;
(vi) the incurrence by the Company of Hedging Obligations under commodity
hedging and currency exchange agreements; PROVIDED that, such agreements
were entered into in the ordinary course of business for the purpose of
limiting risks that arise in the ordinary course of business; and
(vii) the incurrence by the Company and its Subsidiaries of Indebtedness
(in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $10.0 million.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens but only to the extent
securing obligations not constituting Indebtedness) on any of its assets, now
owned or hereafter acquired, securing any Indebtedness other than Senior
Indebtedness unless the Notes are secured equally and ratably with such other
Indebtedness; PROVIDED that, if such Indebtedness is by its terms expressly
subordinate to the Notes, the Lien securing such subordinate or junior
Indebtedness shall be subordinate and junior to the Lien securing the Notes with
the same relative priority as such subordinated or junior Indebtedness shall
have with respect to the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
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distributions to the Company or any of its Subsidiaries on its Capital Stock or
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, (iv) transfer any of its property or assets to the
Company or any of its Subsidiaries, (v) grant liens or security interests on the
assets in favor of the Holders of Notes, or (vi) guarantee the Notes or any
renewals or refinancings thereof, except for such encumbrances or restrictions
existing under or by reason of (A) the Credit Facility, the Indenture, the Notes
or any other agreement in existence on the date of the Indenture, (B) applicable
law, (C) any instrument governing Acquired Indebtedness of Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Acquired Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that the Consolidated EBITDA of such Person is not
taken into account in determining whether such acquisition was permitted by the
terms of the Indenture, or (D) Permitted Refinancing Indebtedness, PROVIDED that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
LIMITATION ON LAYERING INDEBTEDNESS
The Indenture will provide that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company will not, and will not permit
any Subsidiary to, in a single transaction or series of related transactions
consolidate or merge with or into (other than the consolidation or merger of a
Wholly Owned Subsidiary of the Company with another Wholly Owned Subsidiary of
the Company or into the Company) (whether or not the Company or such Subsidiary
is the surviving corporation), or directly and/or indirectly through its
Subsidiaries sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) in one or more
related transactions to, another corporation, Person or entity unless (i) either
(a) the Company, in the case of a transaction involving the Company, or such
Subsidiary, in the case of a transaction involving a Subsidiary, is the
surviving corporation or (b) in the case of a transaction involving the Company,
the entity or the Person formed by or surviving any such consolidation or merger
(if other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia and assumes all the obligations of the Company under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (ii) immediately after such transaction
no Default or Event of Default exists; and (iii) the Company or, if other than
the Company, the entity or Person formed by or surviving any such consolidation
or merger, or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio and the Adjusted Consolidated Net Tangible
Assets to Consolidated Indebtedness Ratio tests set forth in the first paragraph
of the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock."
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TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, after the date of the Indenture, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or make any
payment to, or purchase any property or assets from, or enter into or suffer to
exist any transaction or series of transactions, or make any agreement, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), other than Exempt Affiliate
Transactions, unless (i) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Subsidiary (as reasonably determined by
the Company) than those that would have been obtained in a comparable
transaction by the Company or such Subsidiary with an unrelated Person and (ii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction entered into after the date of the Indenture involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Company or such Subsidiary of such Affiliate Transaction from a financial point
of view issued by an investment banking firm of national standing.
SALE AND LEASEBACK
The Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale and Leaseback Transaction unless (a) the Company or its
Subsidiaries entering into such Sale and Leaseback Transaction could have
incurred the Indebtedness relating to such Sale and Leaseback Transaction
pursuant to the "-- Incurrence of Indebtedness and Issuance of Preferred Stock"
and "-- Liens" covenants and (b) the Net Proceeds of such Sale and Leaseback
Transaction are at least equal to the fair market value of such property as
determined by the Board of Directors of the Company.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes, and file with the Trustee, within 15 days
after it is, or would have been, required to file such with the Commission (i)
all quarterly and annual financial information that is or would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company is or were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that are or would
be required to be filed with the Commission on Form 8-K if the Company is or
were required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon written request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due (upon redemption or otherwise) of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the captions "Repurchase at Option of
Holders -- Change of Control," "Repurchase at Option of Holders -- Asset Sales,"
"-- Ownership of Capital Stock," "-- Restricted Payments," "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" or "-- Merger, Consolidation or
Sale of Assets"; (iv) failure by the Company or any of its Subsidiary for 60
days after notice by the Trustee or Holders of at least 25% of the aggregate
principal amount of the Notes outstanding to comply with
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any of its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of such Indebtedness at final maturity
thereof (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10 million or more; (vi) failure
by the Company or any of its Subsidiaries to pay final judgments (not fully
covered by insurance) aggregating in excess of $1 million, which judgments are
not paid, discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries
or any Unrestricted Subsidiary; and (viii) any Subsidiary Guarantor attempts to
revoke its Subsidiary Guarantee or contest its validity or any Subsidiary
Guarantee shall not be in full force and effect.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Subsidiary or any Unrestricted
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Indenture provides
that if a Default occurs and is continuing, generally the Trustee must, within
90 days after the occurrence of such default, give to the Holders notice of such
Default. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or premium, if any, or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or premium on, or the principal of, the Notes or in respect of a
provision that cannot be amended or waived without the consent of the Holder
affected. See "Amendment, Supplement and Waiver."
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary, as such, shall have any liability for any obligations of the
Company under the Notes or the Indenture or the Subsidiary Guarantors under
their Subsidiary Guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations
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with respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of Notes, cash in U.S. dollars, noncallable Government Securities,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 123rd day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the Company
or others; and (vii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents as well as
certifications, legal opinions and other information and the Company may require
a Holder to pay any taxes and fees required by law or permitted by the
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Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The State Street Bank and Trust Company will be the Trustee under the
Indenture. The Trustee's current address is Corporate Trust Department, Two
International Place, 4th Floor, Boston, Massachusetts 02110.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Costilla Energy, Inc., 400 West Illinois, 10th
Floor, Midland, Texas 79701, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Notes to be sold as set forth herein will initially be issued in the
form of one Global Note (the "Global Note"). The Global Note will be deposited
on the date of the closing of the sale of the Notes offered hereby (the "Closing
Date") with the Trustee as custodian for The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) beneficial ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of the Global
Note, the Global Note Holder will be considered the sole owner or Holder under
the Indenture of any Notes evidenced by the Global Note. Beneficial owners of
Notes evidenced by the Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
Except as provided below, owners of beneficial interests in the Global Note will
not be entitled to have Notes registered in their names and will not receive or
be entitled to receive physical delivery of Notes in definitive form. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Company to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names the Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary.
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Payments by the Depositary's Participants and the Depositary's Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
As long as the Notes are represented by a Global Note, the Depositary's
nominee will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Notes. See "--
Repurchase at the Option of Holders -- Change of Control" and
"-- Asset Sales." Notice by the Depositary's Participants or the Depositary's
Indirect Participants or by owners of beneficial interests in a Global Note held
through such Participants or Indirect Participants of the exercise of the option
to elect repayment of beneficial interests in Notes represented by a Global Note
must be transmitted to the Depositary in accordance with its procedures on a
form required by the Depositary and provided to Participants. In order to ensure
that the Depositary's nominee will timely exercise a right to repayment with
respect to a particular Note, the beneficial owner of such Note must instruct
the broker or other Participant or Indirect Participant through which it holds
an interest in such Note to notify the Depositary of its desire to exercise a
right to repayment. Different firms have cut-off times for accepting
instructions from their customers and, accordingly, each beneficial owner should
consult the broker or other Participant or Indirect Participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to the
Depositary. The Company will not be liable for any delay in delivery of notices
of the exercise of the option to elect repayment.
The Company will issue Notes in definitive form in exchange for the Global
Note if, and only if, either (1) the Depositary is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, or (2) an Event of Default has occurred and is
continuing and the Notes registrar has received a request from the Depositary to
issue Notes in definitive form in lieu of all or a portion of the Global Note.
In either instance, an owner of a beneficial interest in the Global Note will be
entitled to have Notes equal in principal amount to such beneficial interest
registered in its name and will be entitled to physical delivery of such Notes
in definitive form. Notes so issued in definitive form will be issued in
denominations of $1,000 and integral multiples thereof and will be issued in
registered form only, without coupons.
CERTIFICATED NOTES
If the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days then, upon surrender by the Global
Note Holder of its Global Note, Notes in the form of registered definitive Notes
will be issued to each person that the Global Note Holder and the Depositary
identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Notes, the Company will make
all payments of principal, premium, if any, interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearinghouse or next-day funds. The
Company expects that secondary trading in the Certificated Notes will also be
settled in immediately available funds.
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GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will be governed by,
and construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means with respect to any specified Person, (i) any
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means, as of the date of
determination, without duplication, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Subsidiaries
calculated in accordance with Commission guidelines before any state or federal
income taxes, as estimated in a reserve report prepared as of the end of the
Company's most recently completed fiscal year, which reserve report is prepared
or audited by independent petroleum engineers, as increased by, as of the date
of determination, the discounted future net revenue of (A) estimated proved oil
and gas reserves of the Company and its Subsidiaries attributable to any
acquisition consummated since the date of such year-end reserve report, and (B)
estimated oil and gas reserves of the Company and its Subsidiary attributable to
extensions, discoveries and other additions and upward revisions of estimates of
proved oil and gas reserves due to exploration, development, exploitation,
production or other activities conducted or otherwise occurring since the date
of such year-end reserve report which would, in the case of determinations made
pursuant to clauses (A) and (B), in accordance with standard industry practice,
result in such additions or revisions, in each case calculated in accordance
with Commission guidelines (utilizing the prices utilized in such year-end
reserve report), and decreased by, as of the date of determination, the
discounted future net revenue of (C) estimated proved oil and gas reserves of
the Company and its Subsidiaries produced or disposed of since the date of such
year-end reserve report and (D) reductions in the estimated oil and gas reserves
of the Company and its Subsidiaries since the date of such year-end reserve
report attributable to downward revisions of estimates of proved oil and gas
reserves due to exploration, development, exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such revisions, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report); provided that,
in the case of each of the determinations made pursuant to clauses (A) through
(D), such increases and decreases shall be as estimated by the Company's
engineers, except that if as a result of such acquisitions, dispositions,
discoveries, extensions or revisions, there is a Material Change that is an
increase, then such increases and decreases in the discounted future net revenue
shall be confirmed in writing by independent petroleum engineers, (ii) the
capitalized costs that are attributable to oil and gas properties of the Company
and its Subsidiaries to which no proved oil and gas reserves are attributed,
based on the Company's books and records as of a date no earlier than the date
of the Company's latest annual or quarterly financial statements, (iii) the net
working capital (which shall be calculated as all current assets of the Company
and its Subsidiaries minus all current liabilities of the Company and its
Subsidiaries, except current liabilities included in Indebtedness on a date no
earlier than the date of the Company's latest annual or quarterly financial
statements) and (iv) the greater of (I) the net book value of the other tangible
assets of the Company and its Subsidiaries on a date no earlier than the date of
the Company's latest annual or quarterly financial statements and (II) the
appraised value, as estimated by independent appraisers, of other tangible
assets of the Company and its Subsidiaries as of a date no earlier than the date
of the Company's latest audited
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financial statements, MINUS (b) the sum of (i) minority interests of third
parties to the extent included in the calculation of the immediately preceding
clause (a), (ii) the positive remainder, if any, obtained by subtracting (I) gas
balancing underpayments of the Company and its Subsidiaries reflected in the
Company's latest audited financial statements and not otherwise included in the
calculation of the immediately preceding clause (a) from (II) any gas balancing
liabilities of the Company and its Subsidiaries reflected in the Company's
latest audited financial statements and not otherwise included in the
calculation of the immediately preceding clause (a), and (iii) the discounted
future net revenue, calculated in accordance with Commission guidelines
(utilizing the same prices utilized in the Company's year-end reserve report),
attributable to oil and gas reserves of the Company and its Subsidiaries subject
to participation interests, overriding royalty interests or other interests of
third parties, pursuant to participation, partnership, vendor financing or other
agreements then in effect, other than pursuant to Production Payments, or that
otherwise are required to be delivered to third parties, other than pursuant to
Production Payments.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS TO CONSOLIDATED INDEBTEDNESS
RATIO" means, at any time, the ratio of Adjusted Consolidated Net Tangible
Assets at such time to Consolidated Indebtedness at such time.
"AFFILIATE" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (i). For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of any class, or any series of any class, of
equity securities of a Person, whether or not voting, shall be deemed to be
control.
"ASSET SALE" means with respect to any Person, the sale, lease, conveyance
or other disposition, that does not constitute a Restricted Payment or an
Investment, by such Person of any of its assets (including, without limitation,
by way of a Sale and Leaseback and including the issuance, sale or other
transfer of any Equity Interests in any Subsidiary or the sale or other transfer
of any Equity Interests in any Unrestricted Subsidiary of such Person) other
than to the Company (including the receipt of proceeds of insurance paid on
account of the loss of or damage to any asset and awards of compensation for any
asset taken by condemnation, eminent domain or similar proceeding, and including
the receipt of proceeds of business interruption insurance), in each case, in
one or a series of related transactions; PROVIDED that, notwithstanding the
foregoing, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets," (b) the sale or lease of hydrocarbons or other
mineral interests in the ordinary course of business and customary in the Oil
and Gas Business, (c) any Production Payment, (d) a transfer of assets by the
Company to a Wholly Owned Subsidiary of the Company or by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company, (e) an issuance of Equity Interests by a Wholly Owned Subsidiary
of the Company to the Company or to another Wholly Owned Subsidiary of the
Company, (e) sale or other disposition of cash or Cash Equivalents, or (f) any
lease, abandonment, disposition, relinquishment or farm out of any oil and gas
property that are customary in nature and scope in the Oil and Gas Business and
are entered into in the ordinary course of the Oil and Gas Business of the
Company and its Subsidiaries.
"BENEFICIARY", when used with respect to any individual, means the spouse,
lineal descendants, parents and siblings of any such individual, the estates and
the legal representatives of any such individual and any of the foregoing and
the trustee of any bona fide trust of which any such individual and any of the
foregoing are the sole beneficiaries or grantors.
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"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, capital stock, (ii)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of capital
stock, (iii) in the case of partnership, partnership interests (whether general
or limited) and (iv) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"CASH EQUIVALENT" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $500 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, and (c) commercial
paper issued by any Approved Lender (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic corporation rated
A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent
thereof) or better by Moody's and maturing within twelve months of the date of
acquisition.
"CHANGE OF CONTROL" means such time as any of the following events occur:
(i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Cadell S. Liedtke, Michael J.
Grella and Henry G. Musselman and any of their respective Beneficiaries (the
"Approved Shareholders), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50%
of the total Voting Stock of the Company;
(ii) the Company is merged with or into or consolidated with another
Person and, immediately after giving effect to the merger or consolidation,
(A) less than 50% of the total voting power of the outstanding Voting Stock
of the surviving or resulting Person is then "beneficially owned" (within
the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the
stockholders of the Company immediately prior to such merger or
consolidation, and (B) any "person" or "group" (as defined in Section
13(d)(3) or 14(d)(2) of the Exchange Act) other than the Approved
Stockholders has become the direct or indirect "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total
voting power of the Voting Stock of the surviving or resulting Person;
(iii) the Company, either individually or in conjunction with one or
more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise
disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties of the
Company and the Subsidiaries, taken as a whole (either in one transaction or
a series of related transactions), including Capital Stock of the
Subsidiaries, to any Person (other than the Company or a Wholly Owned
Subsidiary);
(iv) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
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(v) the liquidation or dissolution of the Company.
"CONSOLIDATED EBITDA" means, with respect to any Person for any period, the
sum of, without duplication, (i) the Consolidated Net Income of such Person and
its Subsidiaries for such period, plus (ii) to the extent deducted in the
computation of such Consolidated Net Income, the Consolidated Interest Expense
for such period, plus (iii) to the extent deducted in the computation of such
Consolidated Net Income, amortization of deferred financing charges for such
period, plus (iv) provision for taxes based on income or profits for such period
(to the extent such income or profits were included in computing Consolidated
Net Income for such period), plus (v) to the extent deducted in the computation
of such Consolidated Net Income, consolidated depreciation, amortization and
other noncash charges of such Person and its Subsidiaries required to be
reflected as expenses on the books and records of such Person, plus (vi) to the
extent deducted in the computation of such Consolidated Net Income, consolidated
exploration and abandonment expenses of such Person and its Subsidiaries for
such periods, minus (vii) cash payments with respect to any nonrecurring,
noncash charges previously added back pursuant to clause (v), and excluding
(viii) the impact of foreign currency translations. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other noncash charges of, and the exploration
and abandonment expenses of, a Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to such Person by such Subsidiary without prior approval (unless such
approval has been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person for any time,
the Indebtedness of such Person and its Subsidiaries at such time as determined
on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST COVERAGE RATIO" means with respect to any Person for
any period, the ratio of (i) Consolidated EBITDA of such Person and its
Subsidiaries for such period to (ii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period. In the event that the Company or
any of its Subsidiaries incurs, assumes, Guarantees or repays or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the four-quarter reference
period for which the Consolidated Interest Coverage Ratio is being calculated
but on or prior to the date on which the event for which the calculation of the
Consolidated Interest Coverage Ratio is made (the "Calculation Date"), then the
Consolidated Interest Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period, and (ii) the Consolidated EBITDA
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Consolidated Interest Expense attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Consolidated
Interest Expense will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Subsidiaries for such period including, without
limitation, amortization of original issue discount, noncash interest
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payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations, but excluding amortization of deferred financing charges
for such period, and (ii) the consolidated interest expense of such Person and
its Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon), and
(iv) the product of (a) all cash dividend payments (and noncash dividend
payments in the case of a Person that is a Subsidiary) on any series of
preferred stock of such Person payable to a party other than the Company or a
Wholly Owned Subsidiary, times (b) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(unless such approval has been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income of, or any
dividends or other distributions from, any Unrestricted Subsidiary, to the
extent otherwise included, shall be excluded unless distributed in cash to the
Company or one of its Subsidiaries.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the consolidated stockholders' equity of such Person and its consolidated
Subsidiaries as of such date less (w) the amount of such stockholders' equity
attributable to Disqualified Stock, (x) all write-ups subsequent to the date of
the Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person (other than purchase accounting
adjustments made, in connection with any acquisition of any entity that becomes
a consolidated Subsidiary of such Person after the date of the Indenture to the
book value of the assets of such entity), (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in
each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"CREDIT FACILITY" means a credit facility that may be entered into among the
Company and the lenders parties thereto, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, restated or refinanced from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED GUARANTOR SENIOR INDEBTEDNESS" means (i) so long as the Senior
Bank Indebtedness is outstanding, any Subsidiary Guarantor's Indebtedness in
respect of the Senior Bank Indebtedness and (ii) thereafter, any other Guarantor
Senior Indebtedness permitted under the Indenture the principal amount of which
is $15.0 million or more and that has been designated by the Company as
"Designated Guarantor Senior Indebtedness."
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"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Bank
Indebtedness is outstanding, the Senior Bank Indebtedness and (ii) thereafter,
any other Senior Indebtedness permitted under the Indenture the principal amount
of which is $15.0 million or more and that has been designated by the Company as
"Designated Senior Indebtedness"; provided that for purposes of clause (i) of
the first sentence of the third paragraph under the caption "Subordination,"
"Designated Senior Indebtedness" shall also mean any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $15.0 million or
more.
"DISQUALIFIED STOCK" means (a) with respect to any Person, Capital Stock of
such Person that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
(unless any redemption or repurchase of such Capital Stock upon the occurrence
of such event is required by any such terms, but only to the extent that a
payment in respect thereof would be permitted under the covenant set forth under
the caption "Restricted Payments"), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the Holder thereof, in whole or in part, on or prior to the date which
is one year after the date on which the Notes mature and (b) with respect to any
Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Capital Stock other than any common stock with no preference,
privileges, or redemption or repayment provisions.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" mean dollar denominated payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as liabilities in accordance
with GAAP, together with all undertakings and obligations of the Company or any
of its Subsidiaries in connection therewith, which obligations will be deemed to
constitute Indebtedness for borrowed money for purposes of the Indenture.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding prior
to, on or after the date of the Indenture.
"EQUITY OFFERING" means an offer and sale of Qualified Stock of the Company
to a Person other than an Affiliate of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXEMPT AFFILIATE TRANSACTIONS" means (a) transactions between or among the
Company and/or its Wholly Owned Subsidiaries, (b) advances not to exceed
$1,000,000 at any time outstanding to officers of the Company or any Subsidiary
of the Company in the ordinary course of business to provide for the payment of
reasonable expenses incurred by such persons in the performance of their
responsibilities to the Company or such Subsidiary or in connection with any
relocation, (c) fees and compensation paid to and indemnity provided on behalf
of directors, officers or employees of the Company or any Subsidiary of the
Company in the ordinary course of business, (d) any employment agreement that is
in effect on the date of the Indenture in the ordinary course of business and
any such agreement entered into by the Company or a Subsidiary after the date of
the Indenture in the ordinary course of business of the Company or such
Subsidiary and (e) payments and transactions under the Indebtedness of A&P Meter
Service and Supply, Inc. ("A&P") to the Company outstanding on the date of the
Indenture and the performance of and payment for services provided by A&P to the
Company and its Subsidiaries in the ordinary course of business consistent with
past practice. See "Certain Transactions."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
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"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means (i) all Guarantees or other
Indebtedness of a Subsidiary Guarantor in respect of the Senior Bank
Indebtedness and (ii) any other indebtedness permitted to be incurred by a
Subsidiary Guarantor under the terms of this Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated in right of payment to any Indebtedness for money borrowed.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (w) any liability for federal, state, local or
other taxes owed or owing by a Subsidiary Guarantor, (x) any Indebtedness of a
Subsidiary Guarantor to any of the Company's Subsidiaries, Unrestricted
Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness
that is incurred in violation of this Indenture.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in (a)
interest rates, (b) the value of foreign currencies and (c) Oil and Gas Purchase
and Sales Contracts.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money or for the deferred purchase
price of property or services (excluding any trade accounts payable and other
accrued current liabilities incurred in the ordinary course of business), and
all liabilities of such Person incurred in connection with any letters of
credit, bankers' acceptances or other similar credit transactions or any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock outstanding on the date of the Indenture or thereafter, if,
and to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (b) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, if, and to the extent, any of the foregoing would appear as
a liability upon a balance sheet of such Person prepared in accordance with
GAAP, (c) all Indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade accounts payable arising in the ordinary
course of business, (d) all Capitalized Lease Obligations of such Person, (e)
all Indebtedness referred to in the preceding clauses of other Persons and all
dividends of other Persons, the payment of which is secured by (or for which the
holder of such Indebtedness has an existing right to be secured by) any Lien
upon property (including, without limitation, accounts and contract rights)
owned by such Person, even though such Person has not assumed or become liable
for the payment of such Indebtedness (the amount of such obligation being deemed
to be the lesser of the value of such property or asset or the amount of the
obligation so secured) (f) all Production Payments of such Person, (g) all
guarantees by such Person of Indebtedness referred to in this definition, (h)
all Disqualified Stock of such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued dividends and (i) all
obligations of such Person under or in respect to currency exchange contracts,
oil or natural gas price hedging arrangements and Hedging Obligations. For
purposes hereof, the "maximum fixed repurchase price" of Disqualified Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Stock as if Disqualified Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
fair market value of such Disqualified Stock, such fair market value shall be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock; provided, however, that if such Disqualified Stock is not at
the date of determination permitted or required to be repurchase, the "maximum
fixed repurchase price" shall be the book value of such Disqualified Stock.
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"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding advances to officers and employees of the type
specified in clause (b) of the definition of Exempt Affiliate Transactions),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP
and the acquisition, by purchase or otherwise, of all or substantially all of
the business or assets of any other Person.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MATERIAL CHANGE" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal quarter
in the discounted future net cash flows from proved oil and gas reserves of the
Company and its Subsidiaries calculated in accordance with clause (a)(i) of the
definition of Adjusted Consolidated Net Tangible Assets; PROVIDED, however, that
the following will be excluded from the calculation of Material Change: (i) any
acquisition during the quarter of oil and gas reserves that have been estimated
by independent petroleum engineers and on which a report or reports exists and
(ii) any disposition of properties existing at the beginning of such quarter
that have been disposed of pursuant to the provisions of the Indenture described
under the caption "Redemption of the Option of the Holders."
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to Sale and Leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiary or the
extinguishment of any Indebtedness of such Person or any of its Subsidiary, (ii)
any extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss),
and (iii) any gain (but not loss) from currency exchange transactions not in the
ordinary course of business consistent with past practice.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any noncash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither the
Company nor any of its Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"OIL AND GAS BUSINESS" means the business of the exploration for, and
development, acquisition, and production of hydrocarbons, together with
activities ancillary thereto (including with limitation, the gathering,
processing, treatment, marketing and transportation of such production) and
other related energy and natural resources businesses.
"OIL AND GAS PURCHASE AND SALE CONTRACT" means with respect to any Person,
any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
"PERMITTED INVESTMENTS" means (a) any Investments by the Subsidiaries of the
Company in the Company; (b) any Investments in Cash Equivalents; (c) Investments
made as a result of the receipt of noncash consideration from an Asset Sale that
was made pursuant to and in compliance with the covenant described above under
the caption "Repurchase at the Option of Holders -- Asset Sales"; (d)
Investments outstanding as of the date of the Indenture; (e) Investments in
Wholly Owned Subsidiaries engaged in the Oil and Gas Business and Investments in
any Person that, as a result of such Investment (or a series of substantially
contemporaneous Investments made pursuant to a single plan) (x) such other
Person becomes a Wholly Owned Subsidiary engaged in the Oil and Gas Business or
(y) such other Person that is engaged in the Oil and Gas Business is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to the Company or a Wholly Owned Subsidiary in a transaction
permitted under the Indenture; (f) entry into operating agreements, joint
ventures, partnership agreements, working interests, royalty interests, mineral
leases, processing agreements, farm-out agreements, contracts for the sale,
transportation or exchange of oil and natural gas, unitization agreements,
pooling arrangements, area of mutual interest agreements or other similar or
customary agreements, transactions, properties, interests or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, Investments in corporations; (g) entry into any
hedging arrangements in the ordinary course of business for the purpose of
protecting the Company's or any Subsidiaries's production against fluctuations
in oil or natural gas prices; (h) shares of money mutual or similar funds having
assets in excess of $500,000,000, and (i) Investments in an aggregate amount not
to exceed $5,000,000 at any one time outstanding.
"PERMITTED LIENS" means (a) liens for taxes, assessments and governmental
charges not then due or the validity of which is being contested in good faith
by appropriate proceedings, promptly instituted and diligently conducted, and
for which adequate reserves have been established to the extent required by
GAAP; (b) mechanics', workmen's, materialman's, operator's or similar liens
arising in the ordinary course of business; (c) easements, rights of way,
restrictions and other similar encumbrances incurred in the ordinary course of
business or minor imperfections in title that do not impair the value of
property for its intended use; (d) liens on, or related to, properties to secure
all or part of the costs incurred in the ordinary course of business of
exploration, drilling, development or operation thereof; (e) judgment and
attachment liens not giving rise to an Event of Default or liens created by or
existing from any litigation or legal proceeding that are currently being
contested in good faith by appropriate proceedings, promptly instituted and
diligently conducted, and for which adequate reserves have been made to the
extent required by GAAP; (f) liens on deposits made in the ordinary course of
business; (g) liens in favor of collecting or payor banks having a right of
selloff, revocation, refund or chargeback with respect to money or instruments
of the Company or any Subsidiary on deposit with or in possession of such bank;
(h) liens on pipeline or pipeline facilities which arise out of operation of
law; (i) liens on deposits to secure public or statutory obligations or in lieu
of surety or appeal bonds entered into in the ordinary course of business; (j)
liens reserved in oil and gas leases for bonus or rental payments and for
compliance with the terms of such leases; and (k) liens arising under
partnership agreements, oil and gas leases, farmout agreements, division orders,
contracts for the sale, purchase, exchange, transportation or processing of oil,
gas or other hydrocarbons, unitization and pooling declarations and agreements,
development agreements, operating agreements, area of mutual interest agreements
and other agreements that are customary in the Oil and Gas Business.
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"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; PROVIDED that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed the
principal or accrued amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded; (ii) such Permitted Refinancing
Indebtedness has a Weighted Average Life to Maturity and a final maturity date
equal to or greater than the Weighted Average Life to Maturity and final
maturity date, respectively, of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment to the Notes or the Subsidiary Guarantees, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to the Notes and the Subsidiary
Guarantees on terms at least as favorable to the Holders of the Note as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"QUALIFIED STOCK" means, for any Person, any and all Capital Stock of such
Person, other than Disqualified Stock.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SENIOR BANK INDEBTEDNESS" means the Indebtedness outstanding under the
Credit Facility.
"SENIOR INDEBTEDNESS" means (i) the Senior Bank Indebtedness and (ii) any
other Indebtedness permitted to be incurred by the Company under the terms of
the Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of payment to any
Indebtedness for money borrowed. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness will not include (w) any liability for federal,
state, local or other taxes owed or owing by the Company, (x) any Indebtedness
of the Company to any of its Subsidiaries, Unrestricted Subsidiaries or other
Affiliates, (y) any trade payables, or (z) any Indebtedness that is incurred in
violation of the Indenture.
"SENIOR REVOLVING INDEBTEDNESS" means revolving credit borrowings and
letters of credit under the Credit Facility and/or any successor facility or
facilities.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Company
for any purposes of the Indenture.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary, if designated by the Board
of Directors of the Company as an Unrestricted Subsidiary pursuant to a Board
Resolution and permitted to be so designated pursuant to the terms of the
Indenture.
"VOLUMETRIC PRODUCTION PAYMENTS" means volumetric production payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as deferred revenue in
accordance with GAAP, together with all undertakings and obligations of the
Company or any of its Subsidiaries in connection therewith, which will be deemed
to constitute debt for borrowed money for purpose of the Indenture.
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
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"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payments at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
(i) all of the outstanding Capital Stock or other ownership interests of which
(other than directors qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or (ii)
organized in a foreign jurisdiction and is required by the applicable laws and
regulations of such foreign jurisdiction to be partially owned by the government
of such foreign jurisdiction or individual or corporate citizens of such foreign
jurisdiction in order for such Subsidiary to transact business in such foreign
jurisdiction, provided that such Person or one or more Wholly Owned Subsidiaries
of such Person, owns the remaining Capital Stock or ownership interest in such
Subsidiary and, by contract or otherwise, controls the management and business
of such Subsidiary and derives the economic benefits of ownership of such
Subsidiary to substantially the same extent as if such Subsidiary were a wholly
owned Subsidiary. Unrestricted Subsidiaries shall not be included in the
definition of Wholly Owned Subsidiary for any purposes of the Indenture.
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DESCRIPTION OF OTHER INDEBTEDNESS
EXISTING DEBT FACILITY
In June 1996, the Company entered into a credit agreement (the "Existing
Debt Facility") provided by NationsBridge, L.L.C. and NationsBank, N.A. and
consisting of a $95.0 million revolving credit loan (the "Existing Revolver")
and a $30.0 million term loan (the "Existing Term Loan"). The Existing Debt
Facility provided funds to consummate the 1996 Acquisition and to refinance the
Company's prior senior bank facility. Prudential Securities Group Inc. ("PGI")
has purchased an interest in the Existing Debt Facility.
The Existing Revolver and the Existing Term Loan each matures June 10, 1999.
No periodic principal reductions are required with respect to the Existing Term
Loan; however, quarterly principal reductions in the amount of $3.0 million are
required with respect to the Existing Revolver, commencing January 1, 1997. In
addition, the Existing Debt Facility requires that the net proceeds from the
Notes Offering be applied to reduce the amounts outstanding under the Existing
Revolver and the Existing Term Loan, and 100% of the net proceeds from the
Common Stock Offering are required to be utilized to reduce the amounts
outstanding under the Existing Term Loan and Existing Revolver.
Interest accrues on the Existing Term Loan initially at 14.0% per annum,
increasing by 0.5% per annum at the end of each successive three month period
(commencing September 10, 1996) up to a maximum of 16.5% per annum. Interest may
be paid in cash or "in kind" by delivery of additional notes having the same
terms as the notes issued pursuant to the Existing Term Loan. Interest under the
Existing Revolver accrues, at the option of the Company, at a margin in excess
of either NationsBank, N.A. "LIBOR" rate, up to a maximum of 5.0% per annum, or
NationsBank, N.A. fluctuating "prime rate" up to a maximum of 2.75% per annum.
The Existing Debt Facility is secured by a pledge of substantially all of
the Company's assets, guaranties by the Company's subsidiaries and limited
guaranties by Messrs. Liedtke, Grella and Musselman proportionate to their
membership interests in the LLC.
CREDIT FACILITY
The Company is negotiating with several banks to provide the Credit Facility
which will be consummated concurrently with the Offerings. The Company
anticipates that the Credit Facility will provide a revolving facility based on
the borrowing base of its oil and gas assets. Based on its negotiations to date,
the Company anticipates having approximately $50.0 million available pursuant to
the Credit Facility, none of which is expected to be outstanding at its
inception. The Credit Facility is expected to be secured by a pledge of
substantially all of the Company's assets.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $0.10 per share ("Common Stock") and 3,000,000 shares of
preferred stock, par value $0.10 per share ("Preferred Stock"). Upon the
completion of the Offerings and the Corporate Reorganization, the issued and
outstanding capital stock of the Company will consist of 10,000,000 shares of
Common Stock (or 10,600,000 shares if the underwriters' over-allotment option is
exercised in full).
The following description of certain matters relating to the capital stock
of the Company is summary in nature and is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
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available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or winding-up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of all liabilities of the Company and subject to the prior distribution
rights of the holders of any Preferred Stock that may be outstanding at that
time. The holders of Common Stock do not have cumulative voting rights or
preemptive rights. All shares of Common Stock outstanding and to be outstanding
after the Common Stock Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 3,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the stockholders, including the dividend
rights, dividend rate, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or the designations
of such series. No shares of Preferred Stock have ever been issued, and the
Company has no present plans to issue any Preferred Stock. In certain instances
the Indenture limits the ability of the Company to issue Preferred Stock. See
"Description of Notes -- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
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UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Subsidiary Guarantors and
NationsBanc Capital Markets, Inc., and Prudential Securities Incorporated (the
"Underwriters"), the Underwriters severally have agreed to purchase from the
Company and the Company has agreed to sell to the Underwriters severally the
principal amount of Notes set forth opposite the names of such Underwriters
below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
NationsBanc Capital Markets, Inc................................................................ $
Prudential Securities Incorporated..............................................................
----------------
Total....................................................................................... $ 100,000,000
----------------
----------------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to certain conditions, to purchase all of the Notes, if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances, the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company has been advised by the Underwriters that they propose to offer
the Notes to the public initially at the price set forth on the cover page of
this Prospectus, to certain securities dealers (who may include Underwriters) at
such price less a concession not in excess of % of the amount per Note and
that the Underwriters and such dealers may reallow a discount not in excess of
% of the amount per Note to other dealers, including the Underwriters. After
the closing of the public offering, the public offering price, the concession
and the discount to other dealers may be changed by the Underwriters.
There is no currently existing trading market for the Notes, and although
the Underwriters have advised the Company that they currently intend to make a
market in the Notes, they are not obligated to do so and any such market making
may be discontinued at any time, without notice, in the sole discretion of the
Underwriters. Accordingly, there can be no assurance as to the development or
liquidity of any market that may develop for the Notes.
The Company and the Subsidiary Guarantors have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or to contribute to
payments the Underwriters may be required to make in respect thereof.
NationsBanc Capital Markets, Inc. is an affiliate of NationsBank, N.A., NBCC
and NationsBridge, L.L.C. NationsBridge, L.L.C. and NationsBank, N.A. are
lenders under the Existing Credit Facility. PGI is also a lender under the
Existing Credit Facility. See "Description of Other Indebtedness."
NationsBridge, L.L.C., NationsBank, N.A. and PGI will receive their respective
proportionate shares of the repayment by the Company of borrowings under the
Existing Debt Facility from the net proceeds of the Offerings. Prudential
Securities Incorporated is also acting as an underwriter in the Company's
concurrent Common Stock Offering for which it will receive customary
underwriting discounts and commissions. In addition, the Underwriters and their
respective affiliates provide or have provided banking, advisory and other
financial services for the Company in the ordinary course of business for which
they have received customary compensation.
NBCC is a stockholder of the Company and will receive approximately $15.4
million of the proceeds of the Offerings in redemption of a portion of the
membership interests owned by it in the Corporate Reorganization. See "Use of
Proceeds," "The Company -- Corporate Reorganization" and "Security Ownership of
Certain Beneficial Owners and Management." As a result of such ownership, The
National Association of Securities Dealers, Inc. ("NASD") may view this offering
as a participation by NationsBanc Capital Markets, Inc. in the distribution in a
public offering of the securities of an affiliate and this Notes Offering is
being made pursuant to the provisions of Rule 2720 of the NASD's
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Conduct Rules. In accordance with Rule 2720, Prudential Securities Incorporated
is acting as a qualified independent underwriter in the Notes Offering and is
assuming the responsibilities of acting as such in pricing the Notes Offering
and conducting due diligence.
LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being passed
upon for the Company by Cotton, Bledsoe, Tighe & Dawson, a Professional
Corporation, Midland, Texas. Certain matters will be passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1995 and for the year then ended, the statements
of revenues and direct operating expenses of the 1996 Acquisition for the years
ended December 31, 1993, 1994 and 1995, and the statements of revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1994, and for the years ended December 31, 1993
and 1994, have been included herein and in the registration statement in
reliance upon the report of Elms, Faris & Co., P.C., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
In September 1995, the Company changed its principal accountants from Elms,
Faris & Co., P.C. to KPMG Peat Marwick LLP. The reports of Elms, Faris & Co.,
P.C. on the Company's financial statements for the year ended December 31, 1994
did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified in any way as to uncertainty, audit scope or accounting
principles. Moreover, there were no disagreements with Elms, Faris & Co., P.C.
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
Certain information appearing in this Prospectus regarding estimated
quantities of oil and gas reserves and the discounted present value of future
pre-tax cash flows therefrom attributable to the Company's properties and to the
properties included in the 1996 Acquisition is based upon estimates of such
reserves and present values prepared by Williamson Petroleum Consultants, Inc.
All of such information has been so included herein in reliance upon the
authority of such firm as experts in such matters. Set forth as Appendix A is
Williamson's Summary Reserve Report dated July 23, 1996 with respect to the oil
and gas interests of the Company and with respect to properties acquired in the
1996 Acquisition.
AVAILABLE INFORMATION
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information filed
by the Company with the Commission can be inspected at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Regional Offices of the Commission at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7
World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450
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Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site on the Internet at HTTP:\\WWW.SEC.GOV that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Notes offered hereby, reference
is made to the Registration Statement, including the exhibits thereto, which may
be inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the Commission, and copies of which may be obtained from the
Commission at prescribed rates. Statements made in this Prospectus concerning
the contents of any document referred to herein are not necessarily complete.
With respect to each such document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement made herein shall be
deemed qualified by such reference.
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GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ALL-IN FINDING COSTS. The amount of total capital expenditures, including
acquisition costs, and exploration and abandonment costs for oil and gas
activities divided by the amount of proved reserves (expressed in BOE) added
during the specified period (including the effect on proved reserves of reserve
revisions).
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet.
BOE. Equivalent barrels of oil. In reference to natural gas, natural gas
equivalents are determined using the ratio of six Mcf of natural gas to one Bbl
of crude oil, condensate or natural gas liquids.
BTU. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY WELL. A well found to be incapable of producing either oil or gas in
sufficient quantifies to justify completion of an oil or gas well.
EBITDA. Calculated by adding interest, income taxes, depreciation,
depletion and amortization and exploration and abandonment costs to net income
(loss).
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MMBOE. One million barrels of oil equivalent.
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MMCF. One million cubic feet.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES OR PV-10 VALUE. The present
value of estimated future net revenues is an estimate of future net revenues
from a property at its acquisition date, at a specified date, after deducting
production and ad valorem taxes, future capital costs and operating expenses,
but before deducting federal income taxes. The future net revenues have been
discounted at an annual rate of 10% to determine their "present value." The
present value is shown to indicate the
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effect of time on the value of the revenue stream and should not construed as
being the fair market value of the properties. Estimates have been made using
constant oil and natural gas prices and operating costs at the specified date.
PRODUCTIVE WELL. A well that is producing oil or gas that is capable of
production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. 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.
ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of costs of production.
3-D SEISMIC. Advanced technology method of detecting accumulations of
hydrocarbons identified by the collection and measurement of the intensity and
timing of sound waves transmitted into the earth as they reflect back to the
surface.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
WORKING INTEREST. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Costilla Energy, L.L.C.:
Independent Auditors' Reports...................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994,
and 1995, and the Three Months ended March 31, 1995 and 1996 (unaudited).......... F-5
Consolidated Statements of Members' Capital for the Years Ended December 31, 1993,
1994, and 1995, and the Three Months ended March 31, 1996 (unaudited)............. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994,
and 1995, and the Three Months ended March 31, 1995 and 1996 (unaudited).......... F-7
Notes to Consolidated Financial Statements......................................... F-8
Financial Statements of the 1995 Acquisition:
Independent Auditors' Report....................................................... F-21
Statements of Revenues and Direct Operating Expenses for the Years Ended December
31, 1993 and 1994 and the period ended June 12, 1995.............................. F-22
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-23
Financial Statements of the 1996 Acquisition:
Independent Auditors' Report....................................................... F-26
Statements of Revenues and Direct Operating Expenses for the Years Ended December
31, 1993, 1994 and 1995, and the periods ended March 31, 1995 and 1996
(unaudited)....................................................................... F-27
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C. (a Texas limited liability company):
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries as of
December 31, 1995, and the related consolidated statement of operations,
members' capital, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Costilla
Energy, L.L.C. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
April 16, 1996 (except with respect to matters discussed in the last paragraph
of Note 7 and Note 12, as to which the date is May 28, 1996.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries (the
combination of CSL Partners, Costilla Petroleum Corporation and Statewide
Minerals, L.C.) as of December 31, 1994, and the related consolidated statements
of operations, members' capital, and cash flows for the years ended December 31,
1993 and 1994. These consolidated 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 audits 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Costilla Energy, L.L.C. and subsidiaries as of December 31, 1994, and the
results of their operations and their cash flows for the years ended December
31, 1993 and 1994, in conformity with generally accepted accounting principles.
ELMS, FARIS & CO., P.C.
Midland, Texas
March 31, 1995
F-3
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 137 $ 2,616 $ 2,760
Restricted cash......................................................................... -- 250 250
Accounts receivable:
Trade, net............................................................................ 1,042 3,154 2,401
Affiliates............................................................................ -- 507 994
Oil and gas sales..................................................................... 1,715 3,915 4,189
Prepaid and other current assets........................................................ 223 439 800
------- ------- -----------
Total current assets.............................................................. 3,117 10,881 11,394
------- ------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties..................................................................... 22,794 79,897 83,965
Unproved properties................................................................... 2,060 2,903 3,580
Accumulated depletion, depreciation and amortization.................................... (3,562) (9,413) (11,281)
------- ------- -----------
21,292 73,387 76,264
------- ------- -----------
Other property and equipment, net......................................................... 76 679 1,024
Deferred charges (Note 2)................................................................. 29 1,736 1,658
Note receivable -- affiliate.............................................................. 390 684 684
------- ------- -----------
$24,904 $87,367 $91,024
------- ------- -----------
------- ------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................................... $ 22 $ -- $ --
Trade accounts payable.................................................................. 1,712 5,467 6,190
Undistributed revenue................................................................... 110 1,227 1,026
Other current liabilities............................................................... 192 1,691 2,074
------- ------- -----------
Total current liabilities......................................................... 2,036 8,385 9,290
------- ------- -----------
Long-term debt, less current maturities (Note 7).......................................... 23,591 71,494 74,494
Deferred income (Note 2).................................................................. 24 3,319 3,097
Other noncurrent liabilities.............................................................. -- 38 --
------- ------- -----------
Total liabilities................................................................. 25,651 83,236 86,881
------- ------- -----------
Redeemable members' capital (Note 10)..................................................... -- 11,320 11,678
------- ------- -----------
Members' capital (Note 10)................................................................ (747) (7,189) (7,535)
Commitments and contingencies (Note 8).................................................... -- -- --
------- ------- -----------
$24,904 $87,367 $91,024
------- ------- -----------
------- ------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales......................................... $ 4,231 $ 7,637 $ 21,693 $ 2,177 $ 8,833
Interest and other........................................ 56 87 123 3 88
Gain on sale of assets.................................... 110 112 -- -- 30
--------- --------- --------- --------- ---------
4,397 7,836 21,816 2,180 8,951
--------- --------- --------- --------- ---------
Expenses:
Oil and gas production.................................... 1,688 2,351 10,355 896 3,659
General and administrative................................ 952 1,184 3,571 459 1,362
Exploration and abandonments.............................. 218 793 1,650 1,007 228
Depreciation, depletion and amortization.................. 884 1,847 6,095 462 1,986
Interest.................................................. 605 1,458 4,454 407 1,704
Other..................................................... -- -- 2 -- --
--------- --------- --------- --------- ---------
4,347 7,633 26,127 3,231 8,939
--------- --------- --------- --------- ---------
Net income (loss) before federal income taxes........... $ 50 $ 203 $ (4,311) $ (1,051) 12
Provision for federal income taxes
Current................................................... (25) 8 3 -- --
Deferred.................................................. 2 32 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 73 $ 163 $ (4,314) $ (1,051) $ 12
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS'
CAPITAL
-----------
<S> <C>
Balance at January 1, 1993............................................................................. $ 433
Net income........................................................................................... 73
Contributions........................................................................................ 1
Withdrawals.......................................................................................... (456)
-----------
Balance at December 31, 1993........................................................................... 51
Net income........................................................................................... 163
Withdrawals.......................................................................................... (961)
-----------
Balance at December 31, 1994........................................................................... (747)
Issuance costs (Note 10)............................................................................. (753)
Net loss............................................................................................. (4,314)
Withdrawals.......................................................................................... (55)
Preferred return on redeemable members' capital...................................................... (1,320)
-----------
Balance at December 31, 1995........................................................................... (7,189)
Net income (unaudited)............................................................................... 12
Preferred return on redeemable members' capital (unaudited).......................................... (358)
-----------
Balance at March 31, 1996 (unaudited).................................................................. $ (7,535)
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $ 73 $ 163 $ (4,314) $ (1,051) $ 12
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................ 884 1,847 5,958 462 1,986
Amortization of deferred charges..................................... -- -- 137 -- 78
Other noncash........................................................ (21) 35 (75) (67) (47)
Gain on sale of oil and gas properties............................... (110) (112) -- -- (30)
Change in operating assets and liabilities:
Increase in accounts receivable.................................... (837) (1,535) (4,818) (1,562) (7)
Decrease (increase) in other assets................................ 20 301 (216) (146) (361)
Increase in accounts payable....................................... 262 723 4,863 537 522
Increase in other liabilities...................................... 59 102 1,537 -- 345
Increase (decrease) in deferred income............................. (8) 3 3,294 -- (222)
--------- ---------- ---------- --------- ---------
Total adjustments................................................ 249 1,364 10,680 (776) 2,264
--------- ---------- ---------- --------- ---------
Net cash provided by (used in) operating activities.............. 322 1,527 6,366 (1,827) 2,276
--------- ---------- ---------- --------- ---------
Cash flows from investing activities:
Capital expenditures for oil and gas properties........................ (6,634) (11,819) (61,500) (1,342) (4,749)
Proceeds from sale of oil and gas properties........................... 131 112 -- -- --
Additions to other property and equipment.............................. (228) (49) (720) (47) (383)
Advances on affiliate notes receivable................................. -- (390) (247) -- --
--------- ---------- ---------- --------- ---------
Net cash used in investing activities............................ (6,731) (12,146) (62,467) (1,389) (5,132)
--------- ---------- ---------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term debt........................................ 6,770 11,579 62,704 1,960 3,000
Payments of long-term debt............................................. -- -- (11,232) (7,880) --
Deferred loan and financing costs...................................... -- -- (2,587) (753) --
Proceeds from redeemable members' capital.............................. -- -- 10,000 10,000 --
Contributions.......................................................... 1 -- -- -- --
Withdrawals............................................................ (456) (961) (55) (55) --
--------- ---------- ---------- --------- ---------
Net cash provided by financing activities........................ 6,315 10,618 58,830 3,272 3,000
--------- ---------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... (94) (1) 2,729 56 144
Cash and cash equivalents, beginning of period........................... 232 138 137 137 2,866
--------- ---------- ---------- --------- ---------
Cash and cash equivalents, end of period................................. $ 138 $ 137 $ 2,866 $ 193 $ 3,010
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(1) ORGANIZATION AND NATURE OF OPERATIONS
Costilla Energy, L.L.C. (the "Company"), a Texas limited liability company,
was formed on February 14, 1995, as the successor to CSL Partners, a Texas
general partnership, which was organized on January 11, 1989. The Company is an
unincorporated association of several individuals and a corporation and will
cease to exist thirty (30) years from the date of formation. Its members have
limited personal liability for the Company's obligations and debts. The Company
is classified as a partnership for federal income tax purposes.
The Company is an oil and gas exploration and production concern with
properties located principally in West Texas, South Texas, and the Rocky
Mountain regions of the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
As of December 31, 1995, the consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
accounts and transactions between the Company and its subsidiaries have been
eliminated. At December 31, 1993 and 1994, the financial statements of the
Company and its affiliates were combined. Significant intercompany transactions
were eliminated.
USE OF ESTIMATES
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and depository accounts held by banks.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of unsecured accounts receivable from
unaffiliated working interest owners and crude oil and natural gas purchasers.
HEDGING
Premiums paid for commodity option contracts and interest rate swap
agreements are amortized to oil and gas sales and interest expense,
respectively, over the terms of the agreements. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts receivable
under the commodity option contracts and interest rate swap agreements are
accrued as an increase in oil and gas sales and a reduction of interest expense,
respectively, for the applicable periods.
OIL AND GAS PROPERTIES
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment
F-8
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowance. Other unproved properties are amortized based on the Company's
experience of successful drilling and average holding period. Capitalized costs
of producing oil and gas properties, after considering estimated dismantlement
and abandonment costs and estimated salvage values, are depreciated and depleted
by the unit-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
IMPAIRMENT OF LONG-LIVED ASSETS
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 -- ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS 121").
Consequently, the Company reviews its long-lived assets to be held and used,
including oil and gas properties accounted for under the successful efforts
method of accounting, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected future cash flows is less than the carrying
amount of the assets. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
DEFERRED CHARGES
The Company capitalized certain costs incurred in connection with obtaining
the Credit Agreement and the related revolver and term notes (see Note 7 for
definitions and descriptions of each). These costs are being amortized over the
lives of the notes.
DEFERRED INCOME
In November 1995, the Company entered into gas sales agreements whereby it
committed to delivery of a total of 2,379,000 Mmbtu, from December 1, 1995
through December 1, 1996, for a total fixed price of $3,429,610. Income from the
agreements is recognized in the period of delivery.
REVENUE RECOGNITION
The Company uses the production method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in tanks, if
material, is recorded as inventory in the accompanying consolidated financial
statements.
The Company uses the sales method of accounting for natural gas revenues
adjusted for over and under produced amounts associated with gas balancing
arrangements. Under this method, revenues are recognized based on actual volumes
of gas sold to purchasers.
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under gas
balancing agreements in excess of the Company's
F-9
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest in properties covered by such agreements. The Company had $157,785 of
deferred income associated with gas balancing at December 31, 1995. There was no
significant deferred income at December 31, 1994.
ENVIRONMENTAL
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/ or
remediation is probable, and the costs can be reasonably estimated.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
INTERIM FINANCIAL STATEMENTS
The interim financial information as of March 31, 1996, and for the three
months ended March 31, 1995 and 1996, is unaudited. However, in the opinion of
management, these interim financial statements include all the necessary
adjustments to fairly present the results of the interim periods and all such
adjustments are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements for the
years ended December 31, 1993, 1994 and 1995.
(3) ACQUISITION OF OIL AND GAS PROPERTIES
On June 12, 1995, the Company completed the acquisition of certain oil and
gas properties and related assets from Parker & Parsley Development L.P. and
Parker & Parsley Producing L.P. for $46,621,371. The Company funded the
acquisition under the Credit Agreement described in Note (7). Certain of the
acquired properties, which were located outside of the Company's areas of
strategic focus, were sold in 1995. No gain or loss was recorded on these sales.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted FAS 121 effective as of January 1, 1995. FAS 121
requires that long-lived assets held and used by an entity, including oil and
gas properties accounted for under the successful efforts method of accounting,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets
to be disposed of are to be accounted for at the lower of carrying amount or
fair value less cost to sell when management has committed to a plan to dispose
of the assets. All companies, including successful efforts oil and gas
companies, are required to adopt FAS 121 for fiscal years beginning after
December 15, 1995.
In order to determine whether an impairment had occurred, the Company
estimated the expected future cash flows of its oil and gas properties and
compared such future cash flows to the carrying amount of the oil and gas
properties to determine if the carrying amount was recoverable. Based on this
process, no writedown in the carrying amount of the Company's proved properties
was necessary at December 31, 1995.
F-10
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage well-defined
interest rate and commodity price risks. The Company is exposed to credit losses
in the event of nonperformance by the counterparties to its interest rate swap
agreements and its commodity hedges. The Company anticipates, however, that such
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
the counterparties.
COMMODITY HEDGES. The Company utilizes option contracts to hedge the effect
of price changes on future oil and gas production. The following table sets
forth the future volumes hedged by year and the weighted-average strike price of
the option contracts at December 31, 1995:
<TABLE>
<CAPTION>
OIL GAS
VOLUME VOLUME STRIKE PRICE
(BBLS) (MMBTU) PER BBL/MMBTU
----------- ----------- ---------------------
<S> <C> <C> <C>
Oil:
1996............................................... 1,830,000 -- $16.00 - $20.38(a)
1997............................................... 912,500 -- $16.00 - $20.65(a)
Gas:
1996............................................... -- 1,500,000 $1.65(b)
1997............................................... -- 1,350,000 $1.65(b)
</TABLE>
- ------------------------
(a) Represents the weighted-average price of collars established with the
purchase of put option contracts and the sale of call option contracts.
(b) Represents the strike price on purchased put option contracts.
INTEREST RATE SWAP AGREEMENTS. The Company utilizes interest rate swap
agreements to reduce the potential impact of increases in interest rates on
floating-rate, long-term debt. At December 31, 1995, the Company was a party to
two interest rate swap agreements, providing the Company with a fixed interest
rate for the terms of the agreements. The following table sets forth the terms,
fixed rates, and notional amounts of the agreements in place as of December 31,
1995:
<TABLE>
<CAPTION>
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
- ------------------------------------ ------------- -------------------------------
<S> <C> <C>
Jan. 25, 1996 to Jan. 25, 1999 $24 million ranging from 7.5% to 8.5%
May 24, 1995 to May 27, 1997 $60 million 5.99%
</TABLE>
F-11
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1994 and 1995. FASB
Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
Financial assets:
Cash, cash equivalents and restricted cash....................... $ 137 $ 137 $ 2,866 $ 2,866
Receivables (trade).............................................. 1,042 1,042 3,154 3,154
Receivables (oil and gas sales).................................. 1,715 1,715 3,915 3,915
Commodity option contracts....................................... -- -- 165 555
Interest rate swap and option agreements......................... 203 -- 146 (2,970)
Notes receivable -- affiliate.................................... 390 390 684 684
Financial liabilities:
Payables (trade)................................................. 1,712 1,712 5,467 5,467
Deferred income.................................................. -- -- 3,319 2,950
Long-term debt................................................... 23,613 23,613 71,494 71,494
</TABLE>
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH, TRADE RECEIVABLES, AND TRADE PAYABLES: The carrying amounts
approximate fair value because of the short maturity of those instruments.
OTHER CURRENT ASSETS: The amounts reported relate to the commodity option
contracts and interest rate swap agreements described in Note 5. The carrying
amount comprises the unamortized premiums paid for the contracts. The fair value
is estimated using option pricing models and essentially values the potential
for the contracts and agreements to become in-the-money through changes in
commodity prices and interest rates during the remaining terms.
NOTES RECEIVABLE-AFFILIATE: The amounts reported relate to notes receivable
from an affiliated company. The carrying amount approximates fair value because
the rate given to the affiliate company is not materially different from the
affiliate company's bank debt.
DEFERRED INCOME: The amounts reported relate to the gas purchase agreements
described in Note 2. The carrying amount represents the payments received under
the agreements for which subsequent delivery is required. The fair value is
estimated based upon the commodity price at December 31, 1995, for a similar
agreement.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated
by discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
F-12
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(7) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Revolver note.......................................................... $ -- $ 59,824
Term notes............................................................. -- 11,670
Note payable to bank................................................... 23,591 --
Note payable to member................................................. 22 --
--------- ---------
23,613 71,494
Less current maturities............................................ 22 --
--------- ---------
$ 23,591 $ 71,494
--------- ---------
--------- ---------
</TABLE>
At December 31, 1995, the Company and certain of its subsidiaries are
parties to a Credit Agreement with a syndicate of banks (the "Banks"). The
Credit Agreement provides for an aggregate $185 million senior secured revolving
line of credit ("Revolver Notes") and an aggregate of $15 million in senior
secured term notes ("Term Notes"). All notes are secured with the assets of the
Company and are guaranteed by the Company's subsidiaries and, to a limited
extent, its individual members.
The Revolver Notes and Term Notes are subject to an aggregate borrowing
base, as determined by the Banks or their agents in their sole discretion and is
redetermined at least bi-annually as of January 15 and July 15, utilizing oil
and gas reserve information as of the immediately preceding period end. As of
January 15, 1996, the borrowing base was $71,670,000.
All outstanding balances under the Credit Agreement may be designated, at
the Company's option, as either "Base Rate Portions" or "Fixed Rate Portions"
(both as defined in the Credit Agreement), provided that no more than five
Eurodollar Tranches may be outstanding at any time. The Base Rate Portions of
the Revolver Notes bear interest at the fluctuating Base Rate, plus a Revolver
Base Rate Spread ranging from 0.25% to 0.75%, depending upon the outstanding
principal balances of the Term Notes. The Base Rate Portions of the Term Notes
bear interest at the fluctuating Base Rate plus 0.75%. The Fixed Rate Portions
of the Revolver Notes bear interest at the Eurodollar Rate for a fixed period of
time elected by the Company, plus a Revolver Fixed Rate Spread ranging from
2.25% to 3.00%, depending on the outstanding principal balances of the Term
Notes. The Fixed Rate Portions of the Term Notes bear interest at the Eurodollar
Rate for a fixed period of time elected by the Company, plus a Fixed Rate Spread
of 3.00%. As of December 31, 1995, the Company had elected a fixed rate of 8.82%
for the Revolver Notes and had elected fixed rates ranging from 8.82% to 8.94%
for $14,000,000 of the outstanding Term Notes at December 31, 1995. The
remaining balances of the Term Notes bear interest at the Base Rate of
NationsBank Prime plus 1.50% at December 31, 1995.
The outstanding principal balance of the Revolver Notes is due and payable
in sixty (60) monthly installments beginning August 1, 1996, and continuing
regularly thereafter until July 1, 2001. The outstanding principal balance of
the Term Notes is due and payable in two (2) installments, each of which shall
be equal to one-half of the unpaid principal balance of each note, on July 1,
1996, and January 1, 1997.
The Credit Agreement requires the Company to hedge not less than 60% of the
Company's total sales volume, through December 31, 1997, from its proved
developed producing oil and gas reserves, with a floor price of not less than
$16 per Bbl of oil or $1.50 per Mcf of gas.
F-13
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(7) LONG-TERM DEBT (CONTINUED)
Additionally, the Credit Agreement contains various restrictive covenants
and compliance requirements, which include: (a) restrictions on dividends and
the incurrence of additional indebtedness; (b) restrictions as to merger, sale
or transfer of assets; (c) limiting total lease payments and total aggregate
executive compensation to $750,000 and $500,000, respectively, in any fiscal
year; and (d) compliance with certain financial ratios.
The Company was in violation of certain covenants and compliance
requirements as of December 31, 1995. Subsequent to December 31, 1995, such
violations were waived by the Banks.
Maturities of long-term debt at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996...................................................... $ 10,820
1997...................................................... 17,800
1998...................................................... 11,965
1999...................................................... 11,965
2000...................................................... 11,965
Thereafter................................................ 6,979
</TABLE>
The Company paid interest on long-term debt of $546,147, $1,356,604 and
$4,453,684 in 1993, 1994 and 1995, respectively.
As described in Note 12, on June 10, 1996, the Company entered into a new
loan agreement, proceeds of which were used to repay the existing notes.
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and office facilities under operating leases on
which rental expense for the years ended December 31, 1993, 1994 and 1995, was
$110,023, $197,533 and $311,221, respectively. Future minimum lease commitments
under noncancellable operating leases at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996....................................................... $ 257
1997....................................................... 272
1998....................................................... 268
1999....................................................... 195
2000....................................................... 188
Thereafter................................................. 1,190
</TABLE>
SEVERANCE AGREEMENTS
On February 17, 1995, the Company entered into employment agreements with
each of the officers which are effective from the above date through February
17, 2000, or until terminated by the officer or the Company. In addition to
providing a base salary and nominal yearly increases for each officer, the
employment agreements provide for severance payments upon termination of any
such officer's employment or a significant reduction in that officer's duties or
responsibilities.
In the event of such a termination, the Company is obligated to pay the
officer an amount equal to the present value (discounted at 10%) of the
officer's salary which would have been paid through February 17, 2000. The
current annual base salaries for the officers covered under such employment
agreements total approximately $500,000.
EXPLORATION AND DEVELOPMENT
On July 6, 1995, the Company, entered into an agreement with an unaffiliated
third party which had previously obtained a concession from the Republic of
Moldova whereby the Company committed to develop several oil and gas fields in
the Republic of Moldova, commencing in 1995, and embark on a
F-14
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
multi-year 400 kilometer seismic survey, beginning in 1996, in exchange for the
exclusive right to develop and explore for oil and gas in the Republic of
Moldova. Through December 31, 1995, the Company has incurred $214,178 in
connection with these activities.
LETTERS OF CREDIT
As a result of certain bonding and trade creditor requirements, the Company
has caused irrevocable letters of credit to be issued by a bank totaling
$106,000. As of December 31, 1995, no amounts had been drawn on these letters of
credit.
(9) 401(K) PLAN
The Company has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and the Company has an option to match a percentage of the employee's
contribution. The Company has made matching contributions to the plan totaling
$16,950, $8,921 and $22,531 in 1993, 1994 and 1995, respectively.
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
During 1995, NationsBank Capital Corporation ("NBCC") contributed $10
million in exchange for a 30% ownership interest in the Company including the
preferential return described below. The Company incurred $751,737 in legal fees
and broker's commissions in connection with this transaction and recorded these
costs as direct charges to members' capital in 1995.
Redeemable members' capital is subject to a preferential return of 15% per
annum and is redeemable at any time at the Company's option, subject to a
redemption premium as described below, or at NBCC's option on February 17, 2003
or at an earlier date upon occurrence of certain events including a change in
control, certain changes in management, a change in the Company's status as a
limited liability company for tax purposes, or violation of any of various other
restrictive provisions contained in the Regulations of Costilla Energy, L.L.C.
(the "Regulations"). The 15% preferred return is treated as a reduction of
members' capital. The redemption price to be paid by the Company shall be equal
to the initial amount received for the preferred units plus a premium,
determined in the year the units are purchased, as follows:
<TABLE>
<CAPTION>
YEAR AFTER PREMIUM
FEBRUARY 17, 1995 PERCENTAGE
- ----------------------- -------------
<S> <C>
1 10%
2 10%
3 8%
4 6%
5 4%
6 2%
7 0%
8 0%
</TABLE>
NBCC's 30% members' interest may be repurchased by the Company to the extent
the Company has exercised its right to redeem all or a portion of the redeemable
members' capital or the Company may be required to purchase NBCC's members'
capital upon the occurrence of certain events similar
F-15
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL (CONTINUED)
to those events requiring redemption of the redeemable members' capital
described above, but not on any specified date in the future. The redemption
price the Company would pay is determined by the year in which the members'
capital is repurchased, as follows:
<TABLE>
<CAPTION>
AGGREGATE
BEFORE FEBRUARY 17 REDEMPTION PRICE
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 1
1997.............................................................. 1,500,000
1998.............................................................. 3,000,000
1999.............................................................. 4,500,000
2000.............................................................. 5,500,000
</TABLE>
At December 31, 1995, the Company was in violation of various restrictive
provisions of the Regulations. Subsequent to December 31, 1995, NBCC waived such
violations.
(11) RELATED PARTY TRANSACTIONS
Certain members and officers of the Company own interests in and hold
positions with A&P Meter Service and Supply, Inc. ("A&P"), CSL Management
Corporation ("CSL"), 511 Tex L.C. ("511 Tex") and Valley Gathering Company
("Valley").
Advances from the Company to A&P have been consolidated into two promissory
notes. The first note, which was originally executed December 31, 1994, totals
$390,000, including accrued interest of $20,000 at December 31, 1995. The note
bears interest at a floating rate equal to the "prime rate" plus 1.0%. No
principal or interest payments are due until the maturity of the note at
December 31, 2004. The note is secured by a second lien on A&P's accounts
receivable, inventory and equipment. The second note is in the amount of
$294,000, including accrued interest of $47,000, and is dated May 22, 1996. The
note bears interest at 6.0% per annum, is unsecured and is payable upon demand.
During 1995, the Company paid $612,139 to A&P for goods and services provided.
During 1993, 1994 and 1995, the Company paid $312,623, $549,620 and
$592,920, respectively, to CSL for management fees and lease payments on
equipment.
During 1995, the Company paid $67,896 to 511 Tex for office rent.
During 1994 and 1995, the Company paid $2,458 and $440,884, respectively, to
Valley for gas compression and salt water disposal charges. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal wells
and gas compressors.
(12) SUBSEQUENT EVENTS
On March 8, 1996, the Company executed a Purchase and Sale Agreement with
Parker and Parsley Petroleum Company to acquire certain oil and gas properties
for an estimated adjusted purchase price of approximately $40 million. The
properties are located primarily in south and west Texas. The acquisition closed
on June 14, 1996.
In connection with the foregoing, the Company entered into a new loan
agreement with NationsBridge L.L.C., an affiliate of the Company's current
lender, to provide financing of up to $125 million in advances (the "Loans"),
subject to certain terms and conditions. Proceeds of the Loans were used to fund
the Acquisition, to refinance substantially all of the Company's outstanding
indebtedness, and for other general corporate purposes.
Advances under the Loans were to be made in two portions, Tranche A was up
to $95,000,000 and Tranche B was $30,000,000. Tranche A initially bears
interest, at the Company's option, at the applicable prime rate ("Prime") plus
0.75% or LIBOR plus 3.0%. Each margin above Prime and LIBOR increases by 0.50%
at the end of each successive three-month period, up to a maximum of
F-16
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(12) SUBSEQUENT EVENTS (CONTINUED)
2.75% and 5.0% for Prime and LIBOR, respectively. Tranche B initially bears
interest at 14.00% per annum, increasing 0.50% at the end of each successive
three-month period, up to a maximum of 16.5%.
Tranche A loans are subject to a borrowing base determination. The initial
borrowing base is $95,000,000 which is automatically reduced by $3,000,000 per
quarter beginning January 1, 1997. The borrowing base is also subject to
periodic redetermination by NationsBridge L.L.C. based on its determination of
the collateral value of the Company's oil and gas properties. Final maturity of
loans made under Tranches A and B is June 10, 1999.
The Loans are secured by first priority liens, assignments and security
interests in all oil and gas properties, pipelines and gathering systems of the
Company and stock of the Company's subsidiaries. Additionally, the Loans are
subject to various restrictive covenants and compliance requirements, including
but not limited to (a) restrictions on dividends and the incurrence of
additional indebtedness, (b) minimum limitations on the Company's current ratio
and tangible net worth, (c) limitations on payments for leases and executive
compensation, (d) maximum limitations on general and administrative expenses,
capital expenditures and the Company's ratio of debt to adjusted cash flow, and
(e) a requirement to pay to the lender all net oil and gas revenues (as defined
and as adjusted for capital expenditures) on a quarterly basis.
The Company paid the lender's fees and expenses in connection with obtaining
the Loans. The fees were approximately $2,625,000 and will increase by an
additional $625,000 if the Tranche B Loans remain outstanding for more than 90
days. In addition, if the Tranche B amounts are not repaid within one year, an
additional amount of $4,800,000 will accrue.
(13) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Property acquisition costs:
Proved........................................................ $ 4,665 $ 9,649 $ 52,470 $ 2,246
Unproved...................................................... 829 1,232 1,742 677
Exploration..................................................... 2,017 2,167 5,627 1,822
Development..................................................... -- -- 158 232
--------- --------- --------- -------
$ 7,511 $ 13,048 $ 59,997 $ 4,977
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located principally
in the United States, were prepared by the Company as of December 31, 1993, 1994
and 1995, and Williamson Petroleum Consultants as of March 31, 1996. Reserves
were estimated in accordance with guidelines established by the SEC and FASB
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the reserve estimates
utilizing an oil price of $17.79 per Bbl and a gas price of $2.03 per Mcf as of
December 31, 1995, and an oil price of $20.71 per Bbl and a gas price of $2.00
per Mcf as of March 31, 1996.
F-17
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND CONDENSATE GAS
(MBBLS) (MMCF)
------------------- -----------
<S> <C> <C>
Total Proved Reserves:
Balance, January 1, 1993....................................................... 1,985 16,418
Revisions of previous estimates.............................................. 57 1,160
Extensions and discoveries................................................... 380 591
Production................................................................... (158) (865)
Purchases of minerals-in-place............................................... 101 4,315
------- -----------
Balance, December 31, 1993..................................................... 2,365 21,619
Revisions of previous estimates.............................................. (460) (5,424)
Extensions and discoveries................................................... 761 1,520
Production................................................................... (330) (1,600)
Purchases of minerals-in-place............................................... 1,673 11,397
------- -----------
Balance, December 31, 1994..................................................... 4,009 27,512
Revisions of previous estimates.............................................. (570) 425
Extensions and discoveries................................................... 605 8,922
Production................................................................... (950) (4,806)
Purchases of minerals-in-place............................................... 7,694 46,099
------- -----------
Balance, December 31, 1995..................................................... 10,788 78,152
Revisions of previous estimates.............................................. 437 2,615
Extensions and discoveries................................................... 592 296
Production................................................................... (338) (1,643)
Purchases of minerals-in-place............................................... -- --
------- -----------
Balance, March 31, 1996........................................................ 11,479 79,420
------- -----------
------- -----------
Proved Developed Reserves:
January 1, 1993.............................................................. 1,488 10,055
December 31, 1993............................................................ 1,785 13,268
December 31, 1994............................................................ 2,632 16,340
December 31, 1995............................................................ 8,566 57,393
March 31, 1996............................................................... 9,037 55,408
</TABLE>
F-18
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows, less tax basis of the properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ---------------
1993 1994 1995 1996
---------- ----------- ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash flows........................................ $ 83,510 $ 122,098 $ 350,653 $ 396,919
Future costs:
Production............................................. (31,811) (46,345) (145,510) (162,146)
Development............................................ (4,486) (7,157) (16,806) (17,975)
---------- ----------- ------------ ---------------
Future net cash flows.................................... 47,213 68,596 188,337 216,798
10% annual discount for estimated timing of cash flows... (20,836) (31,817) (75,041) (87,707)
---------- ----------- ------------ ---------------
Standardized measure of discounted net cash flows........ $ 26,377 $ 36,779 $ 113,296 $ 129,091
---------- ----------- ------------ ---------------
---------- ----------- ------------ ---------------
</TABLE>
F-19
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------
1993 1994 1995 1996
--------- --------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Increase (decrease):
Purchase of minerals-in-place............................. $ 3,732 $ 15,231 $ 77,343 $ --
Extensions and discoveries and improved recovery, net of
future production and development costs.................. 2,707 4,072 9,799 6,002
Accretion of discount..................................... 2,056 2,638 3,678 2,832
Net change in sales prices, net of production costs....... (209) 503 (3,422) 9,229
Changes in estimated future development costs............. (16) 940 (2,419) (235)
Revisions of quantity estimates........................... 1,203 (7,248) (2,855) 4,839
Sales, net of production costs............................ (2,543) (5,286) (11,338) (5,174)
Changes of production rates (timing) and other............ (1,114) (448) 5,731 (1,698)
--------- --------- ----------- ---------------
Net increase............................................ 5,816 10,402 76,517 15,795
Standardized measure of discounted future net cash flows:
Beginning of period..................................... 20,561 26,377 36,779 113,296
--------- --------- ----------- ---------------
End of period........................................... $ 26,377 $ 36,779 $ 113,296 $ 129,091
--------- --------- ----------- ---------------
--------- --------- ----------- ---------------
</TABLE>
The 1995 future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $15.0 million of future
development costs. If these reserves are not developed, the standardized measure
of discounted future net cash flows for 1995 shown above would be reduced by
approximately $22.4 million.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1995 Acquisition (see Note 1) for the years ended December 31,
1993 and 1994, and the period ended June 12, 1995. These statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 statements of revenues and direct
operating expenses 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 statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1995 Acquisition interests' revenue and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-21
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues:
Oil and condensate...................................................... $ 18,542 $ 16,217 $ 7,572
Natural gas............................................................. 13,780 11,407 3,358
--------- --------- --------------
32,322 27,624 10,930
Direct operating expenses:
Lease operating......................................................... 13,376 11,220 4,550
Workovers and dry hole costs............................................ 462 470 109
Production taxes........................................................ 2,070 2,023 923
--------- --------- --------------
15,908 13,713 5,582
--------- --------- --------------
Revenues in excess of direct operating expenses........................... $ 16,414 $ 13,911 $ 5,348
--------- --------- --------------
--------- --------- --------------
</TABLE>
See the accompanying notes to these statements.
F-22
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 12, 1995, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.
and Parker & Parsley Producing L.P. (collectively, "Parker & Parsley") certain
oil and gas properties (the "1995 Acquisition") for $46,621,371. The
accompanying statements of revenues and direct operating expenses for the 1995
Acquisition do not include general and administrative expenses, interest income
or expense, a provision for depreciation, depletion and amortization, or any
provision for income taxes since historical expenses of this nature incurred by
Parker & Parsley are not necessarily indicative of the costs to be incurred by
the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1995 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1995
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Direct operating expenses are
recognized on the accrual method.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1995 Acquisition is based on
Company prepared reserve estimates, using prices and costs in effect at December
31, 1993 and 1994, and the period ended June 12, 1995. Changes in reserve
estimates were derived by adjusting the period-end quantities and values for
actual production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F-23
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1995 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- -----------
<S> <C> <C>
Proved reserves at December 31, 1992............................... 9,880 60,199
Production......................................................... (1,204) (6,914)
----------- -----------
Proved reserves at December 31, 1993............................... 8,676 53,285
Production......................................................... (1,142) (6,778)
----------- -----------
Proved reserves at December 31, 1994............................... 7,534 46,507
Production......................................................... (479) (2,405)
----------- -----------
Proved reserves at June 12, 1995................................... 7,055 44,102
----------- -----------
----------- -----------
Proved developed reserves at June 12, 1995......................... 6,707 38,151
----------- -----------
----------- -----------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND
GAS RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on period-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1995 Acquisition
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994 JUNE 12, 1995
----------- ----------- -------------
<S> <C> <C> <C>
Future:
Cash inflows................................................. $ 222,698 $ 188,828 $ 191,758
Production costs............................................. (111,619) (97,988) (93,268)
Development costs............................................ (4,797) (4,797) (4,797)
----------- ----------- -------------
Net cash flows before income taxes......................... 106,282 86,043 93,693
10% annual discount for estimated timing of cash flows......... (37,518) (30,373) (33,074)
----------- ----------- -------------
Standardized measure of discounted future net cash flows before
income taxes.................................................. $ 68,764 $ 55,670 $ 60,619
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-24
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
The following are the sources of changes in the standardized measure of
discounted net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
---------- ---------- -------------
<S> <C> <C> <C>
Standardized measure, beginning of period....................... $ 96,022 $ 68,764 $ 55,670
Sales, net of production costs.................................. (16,414) (13,911) (5,348)
Net change in prices............................................ (15,892) (3,910) 8,032
Accretion of discount........................................... 9,602 6,876 2,517
Other........................................................... (4,554) (2,149) (252)
---------- ---------- -------------
Standardized measure, end of period............................. $ 68,764 $ 55,670 $ 60,619
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1996 Acquisition (see Note 1) for the years ended December 31,
1993, 1994 and 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 statements of revenues and direct
operating expenses 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 statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1996 Acquisition interests' revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1996 Acquisition for the years ended December
31, 1993, 1994 and 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-26
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED THREE-MONTH PERIODS
DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and condensate................................... $ 11,467 $ 10,170 $ 10,564 $ 2,659 $ 2,799
Natural gas.......................................... 11,294 10,105 8,645 2,031 1,967
Gas plant............................................ 57 57 126 26 23
Transportation....................................... 39 379 556 139 298
--------- --------- --------- --------- ---------
22,857 20,711 19,891 4,855 5,087
Direct operating expenses:
Lease operating...................................... 10,977 9,053 9,232 1,921 2,179
Workovers and dry hole costs......................... 675 869 1,002 219 247
Production taxes..................................... 1,166 1,089 992 246 250
Gas plant............................................ 131 350 598 216 148
Transportation....................................... 10 394 587 147 122
--------- --------- --------- --------- ---------
12,959 11,755 12,411 2,749 2,946
--------- --------- --------- --------- ---------
Revenues in excess of direct operating expenses........ $ 9,898 $ 8,956 $ 7,480 $ 2,106 $ 2,141
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See the accompanying notes to these statements.
F-27
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 14, 1996, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.,
Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co.
(collectively, "Parker & Parsley") certain oil and gas properties (the "1996
Acquisition") for approximately $42.5 million. The accompanying statements of
revenues and direct operating expenses for the 1996 Acquisition do not include
general and administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income taxes
since historical expenses of this nature incurred by Parker & Parsley are not
necessarily indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1996 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1996
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Direct operating expenses are
recognized on the accrual method.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
The interim financial information for the three months ended March 31, 1995
and 1996, is unaudited. However, in the opinion of management, the interim
statements of revenues and direct operating expenses include all the necessary
adjustments to fairly present the results of the interim periods and all such
adjustments are of a normal recurring nature. The interim statements of revenues
and direct operating expenses should be read in conjunction with the audited
statements of revenues and direct operating expenses for the years ended
December 31, 1993, 1994 and 1995.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1996 Acquisition, as of March
31, 1996, is based on reserve estimates prepared by Williamson Petroleum
Consultants, using prices and costs in effect at that date. Changes in reserve
estimates were derived by adjusting such quantities and values for actual
production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F-28
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1996 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- -----------
<S> <C> <C>
Proved reserves at December 31, 1992.................................................... 7,211 49,963
Production.............................................................................. (718) (5,481)
----- -----------
Proved reserves at December 31, 1993.................................................... 6,493 44,482
Production.............................................................................. (685) (5,217)
----- -----------
Proved reserves at December 31, 1994.................................................... 5,808 39,265
Production.............................................................................. (656) (4,773)
----- -----------
Proved reserves at December 31, 1995.................................................... 5,152 34,492
Production.............................................................................. (154) (991)
----- -----------
Proved reserves at March 31, 1996....................................................... 4,998 33,501
----- -----------
----- -----------
Proved developed reserves at March 31, 1996............................................. 4,515 28,961
----- -----------
----- -----------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND GAS
RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on year-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1996 Acquisition
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1993 1994 1995 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Future:
Cash inflows.............................................. $ 181,010 $ 156,222 $ 165,862 $ 175,507
Production costs.......................................... (116,115) (105,104) (93,878) (91,202)
Development costs......................................... (4,101) (4,101) (4,101) (4,101)
------------ ------------ ----------- -----------
Net cash flows before income taxes...................... 60,794 47,017 67,883 80,204
10% annual discount for estimated timing of cash flows...... (22,564) (17,451) (25,195) (29,768)
------------ ------------ ----------- -----------
Standardized measure of discounted future net cash flows
before income taxes........................................ $ 38,230 $ 29,566 $ 42,688 $ 50,436
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
F-29
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
The following are the sources of changes in the standardized measure of
discounted net cash flows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Standardized measure, beginning of year......................... $ 56,372 $ 38,230 $ 29,566 $ 42,688
Sales, net of production costs.................................. (9,943) (9,264) (7,983) (2,090)
Net change in prices............................................ (11,890) (2,838) 18,141 9,277
Accretion of discount........................................... 5,637 3,823 2,957 1,067
Other........................................................... (1,946) (385) 7 (506)
--------- --------- --------- ------------
Standardized measure, end of year............................... $ 38,230 $ 29,566 $ 42,688 $ 50,436
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-30
<PAGE>
APPENDIX A
July 23, 1996
Costilla Energy, Inc.
400 West Illinois, Suite 1000
Midland, Texas 79701
Attention Mr. Michael J. Grella
Gentlemen:
Subject: Summary Letter (for Inclusion in a Prospectus Included in a
Registration Statement for Costilla Energy, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum
Consultants, Inc. Evaluations (1) to the Interests of Costilla
Petroleum Corporation in Various Properties and (2) to the
Interests of Parker & Parsley Petroleum USA, Inc. in Various
Properties Included in Their First Quarter 1996 Sales Package
Effective April 1, 1996
Williamson Project 6.8393
In accordance with your request, Williamson Petroleum Consultants, Inc.
(Williamson) has prepared a summary letter for inclusion in a prospectus for
Costilla Energy, Inc. (Costilla). The filing of this Prospectus gives effect to
the conversion of Costilla Energy, L.L.C. to Costilla Energy, Inc. This summary
letter includes specific data from two evaluations the subjects of which are
described in Item I. All values and discussion of proved reserves and net
revenues, data utilized, assumptions, and qualifications are taken from and
include by reference data from these two evaluations.
Interests in this summary letter represent the April 1, 1996 effective date
consolidation of the ownership interests of Costilla and the ownership interests
of Parker & Parsley in various properties included in their first quarter 1996
sales package which Costilla acquired on June 14, 1996 but which was made
effective as of January 1, 1996. The Costilla interests include all the
interests of Costilla Energy, L.L.C. and all its wholly-owned subsidiaries
including Costilla Petroleum Corporation.
I. THE TWO SUBJECT EVALUATIONS
This summary letter combines certain proved oil and gas reserves and
revenues from the following two Williamson evaluations:
(1) Evaluation of Oil and Gas Reserves to the Interests of Costilla
Petroleum Corporation in Various Properties, Effective April 1, 1996,
Utilizing Nonescalated Economics, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8393, transmitted July 18, 1996
(the Costilla report)
(2) Evaluation of Oil and Gas Reserves to the Interests of Parker & Parsley
Petroleum USA, Inc. in Various Properties Included in Their First Quarter
1996 Sales Package, Effective April 1, 1996, Utilizing Nonescalated
Economics, for Disclosure to the Securities and Exchange Commission,
Williamson Project 6.8393, transmitted July 18, 1996 (the Acquisition
report)
II. ESTIMATED SEC RESERVES AND FUTURE NET REVENUES
Projections of the reserves that are attributable to the consolidated
interests in this summary letter were based on economic parameters and operating
conditions considered applicable as of April 1, 1996 and are pursuant to the
requirements of the Securities and Exchange Commission (SEC).
In accordance with instructions from Costilla, Williamson utilized lease
operating expenses for the Costilla-operated properties in the Costilla report
that excluded COPAS overhead and internal
A-1
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 2
indirect overhead which are billed to outside working interest owners. The
exclusion of these costs for the operated properties results in the calculation
of a lower economic limit and causes the economic lifetime to be extended.
Williamson has not quantified the incremental reserves resulting from this
procedure. COPAS overhead was excluded from the lease operating expenses for the
Parker & Parsley-operated properties in the Acquisition report.
The present values of the estimated future net revenues from proved reserves
were calculated using a discount rate of 10.00 percent per year and were
computed in accordance with the financial reporting requirements of the SEC.
Following is a summary of the results of the two evaluations effective April 1,
1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
-------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated Interests:
Oil/Condensate, BBL...................... 13,122,088 429,450 2,924,589 16,476,127
Gas, MCF................................. 76,439,217 7,929,591 28,551,497 112,920,305
Future Net Revenue, $:
Undiscounted............................. 212,071,507 18,097,949 66,832,632 297,002,088
Discounted Per Annum at 10.00 Percent.... 135,185,097 9,530,285 34,811,523 179,526,905
</TABLE>
- ------------------------
Note: The values presented in this table are taken from evaluations described in
Item I and include by reference all data, qualifications, and assumptions
from these evaluations. Realization of these values is contingent on
achieving successful results from the various schedules and assumptions in
these evaluations. The available engineering data and the completeness
and/or quality of data utilized in evaluating the properties are detailed
in the specific evaluation. Review of any additionally available data may
necessitate revision to these interpretations and assumptions and impact
these values.
III. DEFINITIONS OF SEC RESERVES (1)
The estimated reserves presented in this summary letter are net proved
reserves, including proved developed producing, proved developed nonproducing,
and proved undeveloped reserves, and were computed in accordance with the
financial reporting requirements of the SEC. In preparing these evaluations, no
attempt has been made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted. The definitions
of oil and gas reserves pursuant to the requirements of the Securities Exchange
Act are:
PROVED RESERVES (2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating
- ------------------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC ACCOUNTING RULES. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210.4-10, p. 329.
(2) Any variations to these definitions will be clearly stated in the report.
A-2
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 3
conditions, i.e., prices and costs as of the date the estimate is made. Prices
and costs include consideration of changes provided only by contractual
arrangements but not on escalations based upon an estimate of future conditions.
A. 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:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. 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.
B. 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.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves;"
2. 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;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal (3), gilsonite and other such sources.
PROVED DEVELOPED RESERVES (4)
Proved developed 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 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
- ------------------------
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
A-3
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 4
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.
IV. DISCUSSION OF SEC RESERVES
A. THE COSTILLA REPORT
A total of 1,014 properties in 294 fields were evaluated in the Costilla
report. Nineteen individual properties had values greater than 1.0 percent
of the total future net revenue discounted at 10.00 percent per annum (DFNR)
and in aggregate represent 34.5 percent of the DFNR in the Costilla report.
The most valued property, the T.B. Pruett Gas Unit No. 3, Soda Lake field,
Ward County, Texas, had a value equal to 4.5 percent of the total DFNR in
the Costilla report. The top eight major-value fields are Talbot (Canyon),
Howard County, Texas; Spraberry (Trend Area), Various Counties, Texas; Soda
Lake (Fusselman), Ward County, Texas; South Buffalo Ridge, Crane County,
Texas; Wattenberg, Weld County, Colorado; East Goldsmith, Ector County,
Texas; Raymond, Sheridan County, Montana; and South West Speaks, Lavaca
County, Texas. These fields contain ten of the 19 top value properties and
represent, in aggregate, 41.0 percent of the total DFNR in the Costilla
report. The remaining 286 fields represent 59.0 percent with no field having
more than 2.9 percent of the DFNR in the Costilla report. A more detailed
property review is included in the Costilla report.
Area oil prices were provided by Costilla to be used at the effective date
with the written assurance that the use of these area prices is reasonable
on an aggregate basis and would not materially affect the income from any
major-value property. These area prices were calculated by adjusting the
West Texas Intermediate oil April 1, 1996 posted price of $20.75 per barrel.
The oil price adjustments for each area are the calculated differences
between the actual price received during 1995 and the posted price for West
Texas Intermediate oil during that same period. After the effective date,
prices were held constant for the life of the properties. No attempt has
been made to account for oil price fluctuations which have occurred in the
market subsequent to the effective date of this report.
Gas prices were provided by Costilla to be used at the effective date. These
prices were based on the April 1996 spot price of $1.75 per million British
thermal units (MMBTU) at the Waha, Texas receipt point. This price was
adjusted with an area price adjustment which was calculated as the
difference between the actual price received during 1995 and the stop price.
The resultant price was further adjusted for the BTU content of the gas for
each well. If the BTU content was unknown, it was assumed to be one MMBTU
per MCF of gas. After the effective date, prices were held constant for the
life of the properties unless Costilla indicated that changes were provided
for by contract. All gas prices were applied to projected wellhead volumes.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics of
the properties included in this report.
Operating expenses were provided by Costilla and represented, when possible,
the latest available 12-month average of all recurring expenses excluding
COPAS and internal indirect overhead costs which are billable to the working
interest owners. These expenses included, but were not limited to, all
direct operating expenses, field overhead costs, and any ad valorem taxes
not
A-4
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 5
deducted separately. Expenses for workovers, well stimulations, and other
maintenance were not included in the operating expenses unless such work was
expected on a recurring basis. Judgments for the exclusion of the
nonrecurring expenses were made by Costilla. In accordance with instructions
from Costilla, Williamson has excluded COPAS overhead and internal indirect
overhead which are billed to the outside working interest owners from the
operating expenses for Costilla-operated properties. The exclusion of these
costs for operated properties results in the calculation of a lower economic
limit and causes the economic lifetime to be extended. Williamson has not
calculated the reserves that have been added as a result of this procedure.
For new and developing properties where data were unavailable, operating
expenses were estimated by Costilla. Operating costs were held constant for
the life of the properties.
State production taxes have been deducted at the published rates as
appropriate. For operated properties, average county ad valorem taxes
provided by Costilla were deducted for those properties located in states
for which the data were available. Any ad valorem taxes for nonoperated
properties or for properties in other states were assumed to be included in
the operating expenses.
All capital costs for drilling and completion of wells and nonrecurring
workover or operating costs have been deducted as applicable. These costs
were provided by Costilla. No adjustments were made to account for the
potential effect of inflation on these costs.
Neither salvage values nor abandonment costs were provided by Costilla to be
included in this evaluation.
B. THE ACQUISITION REPORT
A total of 1,091 properties in 135 fields were evaluated in the Acquisition
report. Eighteen individual properties had values greater than 1.0 percent
of the total DFNR and in aggregate represent 35.5 percent of the DFNR in the
Acquisition report. The most valued property, the H.W. Glasscock Unit,
Howard-Glasscock field, Glasscock County, Texas, has a projected value of
5.7 percent of the total DFNR in the Acquisition report. The top eight
major-value fields are World, Crockett County, Texas; Dimmitt, Loving
County, Texas; Panna Maria, Karnes County, Texas; Giddings, Various
Counties, Texas; Caldwell, Burleson County, Texas; Coletto Creek, Victoria
County, Texas; Sawyer, Sutton County, Texas; and Jameson, Coke County,
Texas. These fields contain 11 of the 18 top value properties and represent,
in aggregate, 51.9 percent of the total DFNR in the Acquisition report. The
remaining fields represent 48.1 percent with no field having more than 2.9
percent of the DFNR in the Acquisition report. A more detailed property
review is included in the Acquisition report.
Area oil prices were provided by Costilla and Parker & Parsley to be used at
the effective date with the written assurance that the use of these area
prices is reasonable on an aggregate basis and would not materially affect
the income from any major-value property. These area prices were calculated
by adjusting the West Texas Intermediate oil April 1, 1996 posted price of
$20.75 per barrel. The oil price adjustments as calculated by Parker &
Parsley for each area are the calculated differences between the actual
price received during 1995 and the posted price for West Texas Intermediate
oil during that same period. After the effective date, prices were held
constant for the life of the properties. No attempt has been made to account
for oil price fluctuations which have occurred in the market subsequent to
the effective date of this report.
Gas prices were provided by Costilla and Parker & Parsley to be used at the
effective date. These prices were based on the April 1996 spot price of
$1.75 per million British thermal units
A-5
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 6
(MMBTU) at the Waha, Texas receipt point. This price was adjusted with an
area price adjustment which was calculated as the difference between the
actual price received during 1995 and the stop price. The resultant price
was further adjusted for the BTU content of the gas for each well. If the
BTU content was unknown, it was assumed to be one MMBTU per MCF of gas.
After the effective date, prices were held constant for the life of the
properties unless Costilla indicated that changes were provided for by
contract. All gas prices were applied to projected wellhead volumes.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics of
the properties included in this report.
Operating expenses were provided by Costilla and Parker & Parsley and
represented, when possible, the latest available 12-month average of all
recurring expenses excluding COPAS and internal indirect overhead costs
which are billable to the working interest owners. These expenses included,
but were not limited to, all direct operating expenses, field overhead
costs, and any ad valorem taxes not deducted separately. Expenses for
workovers, well stimulations, and other maintenance were not included in the
operating expenses unless such work was expected on a recurring basis.
Judgments for the exclusion of the nonrecurring expenses were made by
Costilla or Parker & Parsley. In accordance with instructions from Costilla,
Williamson has excluded COPAS overhead which is billed to the outside
working interest owners from the operating expenses for Parker &
Parsley-operated properties. The exclusion of these costs for operated
properties results in the calculation of a lower economic limit and causes
the economic lifetime to be extended. Williamson has not calculated the
reserves that have been added as a result of this procedure. For new and
developing properties where data were unavailable, operating expenses were
estimated by Costilla or Parker & Parsley. Operating costs were held
constant for the life of the properties.
State production taxes have been deducted at the published rates as
appropriate. For operated properties, average county ad valorem taxes
provided by Costilla were deducted for those properties located in states
for which the data were available. Any ad valorem taxes for nonoperated
properties or for properties in other states were assumed to be included in
the operating expenses.
All capital costs for drilling and completion of wells and nonrecurring
workover or operating costs have been deducted as applicable. These costs
were provided by Costilla or Parker & Parsley. No adjustments were made to
account for the potential effect of inflation on these costs.
Neither salvage values nor abandonment costs were provided by Costilla to be
included in this evaluation.
V. GENERAL EVALUATION CONSIDERATIONS PERTAINING TO THE COSTILLA AND ACQUISITION
REPORTS
The individual projections prepared to produce this summary letter include
data that describe the production forecasts and associated evaluation parameters
such as interests, taxes, product prices, operating costs, investments, salvage
values, abandonment costs, and net profit interests, as applicable.
Net income to the evaluated interests is the future net revenue payable to
others, taxes, operating expenses, investments, salvage values, abandonment
costs, and net profit interests, as applicable. The future net revenue is before
federal income tax and excludes consideration of any encumbrances against the
properties if such exist.
A-6
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 7
No opinion is expressed by Williamson as to the fair market value of the
evaluated properties.
The future net revenues presented in this summary letter were based on
projections of oil and gas production. It was assumed there would be no
significant delay between the date of oil and gas production and the receipt of
the associated revenue for this production.
This summary letter includes only those costs and revenues which are
considered by Costilla to be directly attributable to individual leases and
areas. There could exist other revenues, overhead costs, or other costs
associated with Costilla which are not included in this summary letter. Such
additional costs and revenues are outside the scope of this summary letter. This
summary letter is not a financial statement for Costilla and should not be used
as the sole basis for any transaction concerning Costilla, Parker & Parsley, or
the evaluated properties.
The reserves projections in this summary letter are based on the use of the
available data and accepted industry engineering methods. Future changes in any
operational or economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves. Unforeseen
changes in market demand or allowables set by various regulatory agencies could
also cause actual production rates to vary from those projected. The dates of
first production for nonproducing properties were based on estimates by Costilla
or Williamson and the actual dates may vary from those estimated. Williamson
reserves the right to alter any of the reserves projections and the associated
economics included in this summary letter in any future evaluation based on
additional data that may be acquired.
All data utilized in the preparation of this summary letter with respect to
interests, reversionary status, oil and gas prices, gas categories, gas contract
terms, operating expenses, investments, salvage values, abandonment costs, net
profit interests, well information and current operating conditions, as
applicable, were provided by Costilla, Parker & Parsley, and the operators. Data
obtained after the effective date of the report but prior to the completion of
the report were used only if such data were applied consistently. If such data
were used, the reserves category assignments reflect the status of the wells as
of the effective date. In the Costilla report, daily production data after April
1, 1996 were utilized for new wells in the South Buffalo Ridge, Concho Bluff
(Queen), East Goldsmith (Queen), King Mountain (Penn), and Talbot (Canyon)
fields to assist in determining initial producing and decline rates. Daily
production since the effective date was also used for the Pyote Gas Unit 5 No.
1A, Block 16 (Devonian) field, Ward County, Texas to establish the producing
rate after the well was affected by gas plant problems and for the State 16-05
well in the Raymond field, Sheridan County, Montana to establish the initial
rate of production subsequent to the installation of a downhole pump. Production
data generally through December 1995 or January 1996 provided by Costilla for
the properties in the Costilla report and through November or December 1995
provided by Parker & Parsley for the properties in the Acquisition report were
utilized. All data have been reviewed for reasonableness and, unless obvious
errors were detected, have been accepted as correct. It should be emphasized
that revisions to the projections of reserves and economics included in this
summary letter may be required if the provided data are revised for any reason.
No inspection of the properties was made as this was not considered within the
scope of these projects. No investigation was made of any environmental
liabilities that might apply to the evaluated properties, and no costs are
included for any possible related expenses.
Unless specifically identified and documented by Costilla or Parker &
Parsley as having curtailment problems, gas production trends have been assumed
to be a function of well productivity and not of market conditions. The effect
of "take or pay" clauses in gas contracts was not considered.
A-7
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 8
Oil reserves are expressed in United States (U.S.) barrels of 42 U.S.
gallons. Gas volumes are expressed in thousands of cubic feet (MCF) at 60
degrees Fahrenheit and at the legal pressure base that prevails in the state in
which the reserves are located. No adjustment of the individual gas volumes to a
common pressure base has been made.
Costilla represented to Williamson that it has, or can generate, the
financial and operational capabilities to accomplish those projects evaluated by
Williamson which require capital expenditures.
The estimates of reserves contained in this summary letter were determined
by accepted industry methods and in accordance with the definitions of oil and
gas reserves set forth above. Methods utilized in this summary letter include
extrapolation of historical production trends, material balance determinations,
analogy to similar properties, and volumetric calculations.
Where sufficient production history and other data were available, reserves
for producing properties were determined by extrapolation of historical
production trends or through the use of material balance determinations. Analogy
to similar properties or volumetric calculations were used for nonproducing
properties and those producing properties which lacked sufficient production
history and other data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to subsequent changes in
the analogous properties or subsequent production from the evaluated properties.
Volumetric calculations are often based upon limited log and/or core analysis
data and incomplete reservoir fluid and formation rock data. Since these limited
data must frequently be extrapolated over an assumed drainage area, subsequent
production performance trends or material balance calculations may cause the
need for significant revisions to the estimates of reserves.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics in
this summary letter.
VII. DECLARATION OF INDEPENDENT STATUS AND CONSENT
We understand that our estimates are to be included in a Registration
Statement on Form S-1 (the Registration Statement) to be filed with the SEC and
in the Prospectus as included in such Registration Statement which will be
registered under the Securities Act of 1933, as amended.
Williamson is an independent consulting firm and does not own any interests
in the oil and gas properties covered by this summary letter. Roy C. Williamson,
Jr., Chief Executive Officer, owns a 2.5 percent working interest in six wells
in the Outlook field, Sheridan County, Montana, which have a total value of
$138,912 to the interests of Costilla. No employee, officer or director of
Williamson is an employee, officer or director of Costilla or Parker & Parsley.
Neither the employment of nor the compensation received by Williamson is
contingent upon the values assigned to the oil and gas properties covered by
this summary letter.
We consent to the inclusion of this summary letter in the Registration
Statement, the inclusion in the Registration Statement of data extracted from
this summary letter and to all references to our firm in the Prospectus,
including any references to our firm as Experts.
Yours very truly,
WILLIAMSON PETROLEUM CONSULTANTS, INC.
A-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION WHERE, OR ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 11
The Company.................................... 17
Common Stock Offering.......................... 17
Use of Proceeds................................ 18
Capitalization................................. 19
Pro Forma Condensed Financial Statements....... 20
Selected Financial Information................. 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 29
Business and Properties........................ 34
Management..................................... 46
Security Ownership of Certain Beneficial Owners
and Management................................ 49
Executive Compensation and Other Information... 50
Certain Transactions........................... 52
Description of Notes........................... 54
Description of Other Indebtedness.............. 81
Description of Capital Stock................... 81
Underwriting................................... 83
Legal Matters.................................. 84
Experts........................................ 84
Available Information.......................... 84
Glossary....................................... 86
Index to Financial Statements.................. F-1
Summary Reserve Report......................... A-1
</TABLE>
COSTILLA ENERGY, INC.
$100,000,000 % SENIOR
SUBORDINATED NOTES DUE 2006
---------------------
PROSPECTUS
---------------------
NATIONSBANC CAPITAL MARKETS, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 34,483
NASD filing fee................................................... 10,500
Blue Sky fees and expenses........................................ 10,000
Accounting fees and expenses...................................... *
Engineering fees and expenses..................................... *
Trustee fees and expenses......................................... *
Legal fees and expenses........................................... *
Printing and mailing expenses..................................... *
Miscellaneous.....................................................
---------
TOTAL.......................................................
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify certain persons, including officers and directors and
former officers and directors, and to purchase insurance with respect to
liability arising out of their capacity or status as officers and directors.
Such law provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which officers and directors may
be entitled under the corporation's bylaws, any agreement or otherwise. Article
IX of the Company's Certificate of Incorporation, included in Exhibit 3.1
hereto, and Article VI of the Company's Bylaws, included in Exhibit 3.2 hereto,
provide, in general, that the Company shall indemnify its directors and officers
under the circumstances defined in Section 145 of the General Corporation Law of
the State of Delaware and gives authority to the Company to purchase insurance
with respect to such indemnification. The Company may in the future seek to
obtain insurance providing for indemnification of officers and directors of the
Company and certain other persons against liabilities and expenses incurred by
any of them in certain stated proceedings and under certain stated conditions.
In addition, Section 102(b)(7) of the General Corporation Law of the State
of Delaware permits a corporation to limit the liability of its directors
subject to certain exceptions. In accordance with Section 102(b)(7), Article VI
of the Company's Certificate of Incorporation, included in Exhibit 3.1 hereto,
provides, in general, that no director of the Company shall be personally liable
for (i) any breach of the directors' duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the General Corporation Law of the State of Delaware or (iv) any
transaction from which the director derived an improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriter
of the Registrant, its directors and officers, and by the Registrant of the
Underwriter, for certain liabilities, including liabilities arising under the
Securities Act of 1933 (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to the consummation of the Notes Offering, the Company issued an
aggregate of 300 shares of Common Stock to Messrs. Liedtke, Grella and Musselman
in its initial capitalization, which shares were cancelled in connection with
the Corporate Reorganization, and an aggregate of 6,000,000 shares of Common
Stock to the four members of the LLC in the merger of the LLC with and into the
Company. Such shares were not registered under the Securities Act in reliance
upon the exemption from registration provided by Section 4(2) thereof.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
*4.1 Form of Notes or Global Certificate (included as Exhibit A to the form of Indenture filed as
Exhibit No. 4.2 to this Registration Statement)
*4.2 Form of Indenture
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**6.1 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**6.2 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.1 Form of Credit Agreement to be entered into contemporaneously with the closing of the
Offerings between the Company as Borrower and as Lender.
*10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla Energy,
L.L.C.
*10.3 Concession Agreement dated July 6, 1996 between the Government of the Republic of Moldova and
the Resource Development Company, Limited.
*10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company and
Resources Development Limited, L.L.C. (DE).
**10.5 Consolidation Agreement to be effective contemporaneously with closing of the Offerings to
consummate the Corporate Reorganization.
**10.6 1996 Stock Option Plan.
**10.7 Outside Directors Stock Option Plan.
*10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996.
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings.
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings.
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings.
*10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and Koch Oil
Company.
*10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier Oil and
Refining Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*12.1 Computation of Ratio of EBITDA to Interest Expense
*12.2 Computation of Ratio of Earnings to Fixed Charges
*12.3 Pro Forma Computation of Ratio of ACNTA to Total Debt
*21.1 Subsidiaries of the Registrant
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
*23.3 Consent of Elms, Faris & Co., P.C.
**23.4 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Costilla Energy, Inc. authorizing
signature pursuant to Power of Attorney
*25.1 Statement of Eligibility and Qualification of Trustee under 1939 Act on Form T-1
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
(b) Financial Statement Schedules.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, 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 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 of
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such directors, 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A under the Securities Act and contained in a form of Prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registrant Statement as of the
time it was declared effective and (ii) each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunder duly authorized in the City of Midland, State of Texas,
on July 25, 1996.
COSTILLA ENERGY, INC.
(Registrant)
By: *
--------------------------------------
Michael J. Grella
PRESIDENT AND CHIEF OPERATING
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------- ----------------
<C> <S> <C>
* Chairman of the Board,
------------------------------------------- Chief Executive Officer July 25, 1996
Cadell S. Liedtke and Director
* President, Chief
------------------------------------------- Operating Officer and July 25, 1996
Michael J. Grella Director
*
------------------------------------------- Executive Vice President July 25, 1996
Henry G. Musselman and Director
/s/ BOBBY W. PAGE Senior Vice Present,
------------------------------------------- Treasurer and Chief July 25, 1996
Bobby W. Page Financial Officer
*
------------------------------------------- Director July 25, 1996
Jerry J. Langdon
*
------------------------------------------- Director July 25, 1996
W.D. Kennedy
*By: /s/ BOBBY W. PAGE
-------------------------------------------
Bobby W. Page
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
*4.1 Form of Notes or Global Certificate (included as Exhibit A to the form of Indenture filed as
Exhibit No. 4.2 to this Registration Statement)
*4.2 Form of Indenture
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**6.1 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**6.2 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.1 Form of Credit Agreement to be entered into contemporaneously with the closing of the
Offerings between the Company as Borrower and as Lender.
*10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla Energy,
L.L.C.
*10.3 Concession Agreement dated July 6, 1996 between the Government of the Republic of Moldova and
the Resource Development Company, Limited.
*10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company and
Resources Development Limited, L.L.C. (DE).
**10.5 Consolidation Agreement to be effective contemporaneously with closing of the Offerings to
consummate the Corporate Reorganization.
**10.6 1996 Stock Option Plan.
**10.7 Outside Directors Stock Option Plan.
*10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996.
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings.
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings.
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings.
*10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and Koch Oil
Company.
*10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier Oil and
Refining Company.
*12.1 Computation of Ratio of EBITDA to Interest Expense
*12.2 Computation of Ratio of Earnings to Fixed Charges
*12.3 Pro Forma Computation of Ratio of ACNTA to Total Debt
*21.1 Subsidiaries of the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
*23.3 Consent of Elms, Faris & Co., P.C.
**23.4 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Costilla Energy, Inc. authorizing
signature pursuant to Power of Attorney
*25.1 Statement of Eligibility and Qualification of Trustee under 1939 Act on Form T-1
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
<PAGE>
[DRAFT of July 19, 1996]
$100,000,000
COSTILLA ENERGY, INC.
____% NOTES DUE 2006
UNDERWRITING AGREEMENT
___________ ___, 1996
NationsBanc Capital Markets, Inc.
Prudential Securities Incorporated
c/o NationsBanc Capital Markets, Inc.
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Dear Sirs:
SECTION 1. INTRODUCTORY. Costilla Energy, Inc., a Delaware corporation
(the "Company"), confirms its agreement with the several Underwriters named
in Schedule I hereto (the "Underwriters"), to issue and sell $100,000,000
principal amount of its ____% Notes due 2006 (the "Notes"). The Notes are to
be issued pursuant to the provisions of an indenture dated as of
_____________, 1996 (the "Indenture") between the Company and
___________________, as trustee (the "Trustee"). As provided in the
Indenture, the Notes are to be fully and unconditionally guaranteed on a
subordinated basis pursuant to guarantees (the "Subsidiary Guarantees") of
the Company's subsidiaries (the "Subsidiary Guarantors"). It is understood
and agreed to by all parties hereof that, prior to the Closing Date (as
hereinafter defined), the Company will issue in a public offering __________
shares of its common stock (the "Stock Offering"). Each of the Company and
the Subsidiary Guarantors hereby agrees with the Underwriters as follows:
SECTION 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company and the Subsidiary Guarantors, jointly and severally, represent
and warrant to, and agree with, the several Underwriters that:
(a) A registration statement on Form S-1 (File No.
333-________) with respect to the Notes (i) has been prepared by the
Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the "Rules
<PAGE>
and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, (ii) has been filed with the Commission under
the Act and (iii) either has become effective under the Act and is not
proposed to be amended or is proposed to be amended by amendment or
post-effective amendment. If the Company does not propose to amend such
registration statement and if any post-effective amendment to such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent such amendment
has been declared effective by the Commission. Copies of such
registration statement as amended to date have been delivered by the
Company to you. For purposes of this Agreement, "Effective Time" means
the date and the time as of which such registration statement, or the
most recent post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date of the
Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereof, before it became
effective under the Act and any prospectus filed with the Commission by
the Company with the consent of the Underwriters pursuant to Rule 424(a)
of the Rules and Regulations prior to the filing of the Prospectus;
"Registration Statement" means such registration statement, as amended
at the Effective Time, including any documents incorporated by reference
therein and, if the Effective Date is on or before the date of this
Agreement, all information contained in the final prospectus filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations
("Rule 424(b)") in accordance with Section 5(a) hereof and deemed to be
a part thereof as of the Effective Time pursuant to the Rules and
Regulations; "Prospectus" means the form of prospectus relating to the
Notes, as first used to confirm sales of the Notes; and "described in
the Prospectus" or "disclosed in the Prospectus" means described or
disclosed, as applicable, in the Prospectus. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus.
(b) At the Effective Time and at all times subsequent thereto up
to the Closing Date hereinafter mentioned, the Registration Statement
and the Prospectus, and any amendments or supplements thereto, conform
in all material respects with the requirements of the Act and the Rules
and Regulations, and at the Effective Time the Registration Statement
did not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented at the Closing Date, if applicable, did not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading; except that
the foregoing does not apply to (i) that part of the Registration
Statement that constitutes the Statement of Eligibility and
Qualification (Form T-1) under the Trust Indenture Act of 1939, as
amended (the "1939 Act"), of the Trustee, and (ii) statements or
omissions in the Registration Statement or the Prospectus, as amended or
supplemented if applicable, based upon written information furnished to
the Company by any Underwriter through you specifically for use therein.
(c) The consolidated financial statements included in the
Registration Statement and Prospectus present fairly the consolidated
financial position of the Company and its consolidated subsidiaries as
at the dates indicated and the results of their operations and the
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changes in their consolidated financial position for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis during the periods involved, except as indicated therein; and the
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. The pro forma
financial statements set forth in the Registration Statement and the
Prospectus (the "pro forma financial statements") have been prepared in
accordance with the applicable accounting requirements of Rule 11-02 of
Regulation S-X; the pro forma adjustments reflected in the pro forma
financial statements have been properly applied to the historical
amounts in the compilation of such statements; and the assumptions used
in the preparation of the pro forma financial statements are, in the
opinion of the Company, reasonable.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
stated therein, (i) there has been no material adverse change in the
condition, financial or otherwise, earnings, affairs or business
prospects of the Company and its subsidiaries considered as a whole,
whether or not arising in the ordinary course of business and (ii) there
have been no material transactions entered into by the Company or any of
its subsidiaries other than those in the ordinary course of business.
(e) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Registration
Statement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
it owns or leases properties or in which the conduct of its business
requires such qualification, except to the extent that the failure to be
so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries considered as a whole.
(f) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation or
limited liability company in good standing under the laws of the
jurisdiction of its formation, has corporate power and authority to own,
lease and operate its properties and conduct its business as described
in the Registration Statement and is duly qualified as a foreign
corporation or limited liability company to transact business and is in
good standing in each jurisdiction in which it owns or leases properties
or in which the conduct of its business requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries considered as a whole; all of the issued and outstanding
capital stock or other equity interest of each subsidiary has been duly
authorized and validly issued and is fully paid and nonassessable, and
all such capital stock or other equity interest of each subsidiary is
owned by the Company, directly or through subsidiaries, free and clear
of any mortgage, pledge, lien, encumbrance, claim or equity.
(g) Neither the Company nor any of its subsidiaries is (i)
in violation of its or any of their charters or by-laws or other
organizational documents or (ii) in default in the
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performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which it or any of them is
a party or by which it or any of them or their properties may be bound
except to the extent that such default would not have a material adverse
effect on the Company and its subsidiaries considered as a whole; no
consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Company of
the transactions contemplated by this Agreement, except such as may be
required under the Act, the 1939 Act, the Rules and Regulations or state
securities or Blue Sky laws; and the execution and delivery of this
Agreement, the Indenture and the Notes and the consummation of the
transactions contemplated herein and therein will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject,
nor will such action result in any violation of or conflict with the
provisions of the charter or by-laws of the Company or any law,
administrative regulation or administrative or court decree.
(h) The Company and its subsidiaries possess adequate
certificates, authorities, licenses or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to
conduct the business now operated by them, and neither the Company nor
any of its subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such certificate, authority,
license or permit which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would materially adversely
affect the condition, financial or otherwise, earnings, affairs or
business prospects of the Company and its subsidiaries considered as a
whole.
(i) Except as set forth in the Prospectus, there is no action,
suit or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its
subsidiaries, which might result in any material adverse change in the
condition, financial or otherwise, earnings, affairs or business
prospects of the Company and its subsidiaries considered as a whole, or
might materially and adversely affect the properties or assets thereof
or might materially and adversely affect the offering of the Notes; and
there are no material contracts or other documents which are required to
be filed as exhibits to the Registration Statement by the Act or by the
Rules and Regulations which have not been so filed.
(j) The Company and each of its subsidiaries has good and
defensible title to all property and assets owned by it and necessary in
the conduct of the business of the Company or such subsidiary in each
case free and clear of all liens, encumbrances and defects except (i)
such as are referred to in the Prospectus or (ii) such as do not
materially adversely affect the value of such property to the Company or
such subsidiary, and do not interfere with the use made and proposed to
be made of such property by the Company or such subsidiary to
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an extent that such interference would have a material adverse effect on
the Company or such subsidiary.
(k) This Agreement has been duly authorized, executed and
delivered by the Company and each of the Subsidiary Guarantors and is a
valid and binding agreement of the Company and each of the Subsidiary
Guarantors (subject, as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium or other laws
affecting creditors' rights generally from time to time in effect and to
general equitable principles), except as rights to indemnity hereunder
may be limited by applicable law.
(l) The Indenture has been duly authorized, executed and delivered
by the Company and each of the Subsidiary Guarantors and duly qualified
under the 1939 Act, and constitutes a legal, valid and binding
instrument enforceable against the Company and each of the Subsidiary
Guarantors in accordance with its terms (subject, as to the enforcement
of remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally from time
to time in effect and to general equitable principles).
(m) The Notes have been duly and validly authorized by the Company
for issuance and sale to the Underwriters pursuant to this Agreement
and, when executed by the Company and authenticated by the Trustee in
accordance with the Indenture and delivered to the Underwriters against
payment therefor in accordance with the terms hereof, will have been
validly issued and delivered, free of any preemptive or similar rights,
and will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture and enforceable against the
Company in accordance with their terms (subject, as to the enforcement
of remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally from time
to time in effect and to general equitable principles). The Notes
conform, or will conform, to the description thereof in the Registration
Statement and the Prospectus. Neither the filing of the Registration
Statement nor the offering or sale of the Notes as contemplated by this
Agreement gives rise to any rights, other than those which have been
duly waived or satisfied, for or relating to the registration of any
securities of the Company. The capitalization of the Company as of the
date of the most recent balance sheet included in the Prospectus is as
set forth in the Prospectus. The Company has all requisite corporate
power and authority to issue, sell, and deliver the Notes in accordance
with and upon the terms and conditions set forth in this Agreement and
in the Registration Statement and Prospectus. All corporate action
required to be taken by the Company for the authorization, issuance,
sale and delivery of the Notes to be sold by the Company hereunder has
been validly and sufficiently taken.
(n) The Subsidiary Guarantees have been duly and validly
authorized by the Subsidiary Guarantors, and, when executed and endorsed
upon the Notes and delivered in accordance with the terms of the
Indenture, such Subsidiary Guarantees will be valid and binding
obligations of the Subsidiary Guarantors, enforceable against the
Subsidiary Guarantors in accordance with their terms (subject, as to the
enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting
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creditors' rights generally from time to time in effect and to general
equitable principles); the issuances of the Subsidiary Guarantees are
not subject to preemptive or other similar rights to subscribe to or
purchase the same arising by operation of law or under the charter,
bylaws or other organizational documents of any of the Subsidiary
Guarantors or otherwise; the form of notation to be set forth on each
Note to evidence the Subsidiary Guarantees will be in the form
contemplated by the Indenture; and the Subsidiary Guarantees conform in
all material respects to the description thereof contained in the
Registration Statement and the Prospectus. The issuance and performance
of the Subsidiary Guarantees and the consummation of the other
transactions contemplated herein and therein, and compliance by the
Subsidiary Guarantors with their respective obligations hereunder and
thereunder, have been duly and validly authorized by all necessary
corporate or partnership action on the part of each of the Subsidiary
Guarantors.
(o) KPMG Peat Marwick, LLP and Elms Faris & Company, who have
certified certain financial statements of the Company and its
subsidiaries, are independent public accountants within the meaning of
the Securities Act and the rules and regulations thereunder.
(p) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(q) Neither the Company nor any of its subsidiaries is now or,
after giving effect to the issuance of the Notes and the Subsidiary
Guarantees, will be (i) insolvent, (ii) left with unreasonably small
capital, on a pro forma basis, with which to engage in its anticipated
businesses or (iii) incurring debts beyond its ability to pay such debts
as they become due.
(r) The Company and its subsidiaries own or otherwise possess the
right to use all patents, trademarks, service marks, trade names and
copyrights, all applications and registrations for each of the
foregoing, and all other proprietary rights and confidential information
used in the conduct of their respective businesses as currently
conducted; and neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware, of any infringement of or
conflict with the rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse effect on the Company.
(s) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; neither the Company nor
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<PAGE>
any of its subsidiaries have been refused any insurance coverage sought
or applied for; and neither the Company nor any of its subsidiaries have
any reason to believe that they will not be able to renew their existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a material adverse effect on
the Company.
(t) The Company has complied and will comply with all the
provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of
Florida) and all regulations promulgated thereunder relating to issuers
doing business in Cuba.
(u) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted
by the Rules and Regulations.
(v) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company
or any of its subsidiaries (or, to the knowledge of the Company, any of
their predecessors in interest) at, upon or from any of the property now
or previously owned or leased by the Company or its subsidiaries in
violation of any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit, or which would require remedial action under
any applicable law, ordinance, rule, regulation, order, judgment, decree
or permit, except for any violation or remedial action which would not
have, or could not be reasonably likely to have, singularly or in the
aggregate with all such violations and remedial actions, a material
adverse effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such
property or into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its subsidiaries or
with respect to which the Company or any of its subsidiaries have
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or would not
be reasonably likely to have, singularly or in the aggregate with all
such spills, discharges, leaks, emissions, injections, escapes, dumpings
and releases, a material adverse effect on the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and the terms "hazardous
wastes," "toxic wastes," "hazardous substances" and "medical wastes"
shall have the meanings specified in any applicable local, state,
federal and foreign laws or regulations with respect to environmental
protection.
SECTION 3. PURCHASE, SALE AND DELIVERY OF NOTES. Subject to the terms
and conditions and in reliance upon the representations and warranties herein
set forth, the Company agrees to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to
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<PAGE>
purchase from the Company at a purchase price of _______% of the principal
amount per Note (the "purchase price per Note"), plus accrued interest, if
any, from _________, 1996 to the date of payment and delivery, the respective
principal amount of Notes set forth opposite such Underwriter's name in
Schedule I hereto.
Delivery of and payment for the Notes shall be made at __________ a.m.
New York City time, on __________, 1996, or such later date (not later than
__________, 1996) as you shall designate, which date and time may be
postponed by agreement between you and the Company or as provided in Section
11 hereof (such date and time of delivery and payment for the Notes being
herein called the "Closing Date"). Delivery of the Notes shall be made to
you for the respective accounts of the Underwriters against payment by the
Underwriters through you of the purchase price thereof to or upon the order
of the Company by certified or official bank check or checks payable in
immediately available funds; PROVIDED, that the amount of such payment shall
be reduced by one days' interest on the amount of gross proceeds at the
Underwriters' cost of borrowing such funds plus any other expenses associated
with such payment of immediately available funds. Delivery of the Notes shall
be made at such location as you shall reasonably designate at least one
business day in advance of the Closing Date and payment for the Notes shall
be made at the office of Baker & Botts, L.L.P. ("Counsel for the
Underwriters"), One Shell Plaza, 910 Louisiana, Houston, Texas 77002.
The Company, Prudential Securities Incorporated (the "Independent
Underwriter") and the other Underwriter agree to comply in all material
respects with all of the requirements of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. ("Rule 2720") applicable
to them in connection with the offering and sale of the Notes. The Company
agrees to cooperate with Underwriters, to enable the Underwriters to comply
with Rule 2720 and the Independent Underwriter to perform the services
contemplated by this Agreement.
The Independent Underwriter hereby consents to the references to it as
set forth under the caption "Underwriting" in the Prospectus.
SECTION 4. OFFERING BY UNDERWRITERS. The several Underwriters will
offer the Notes for sale to the public on the terms as set forth in the
Prospectus.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the each Underwriter that:
(a) The Company will advise you promptly of any proposal to amend
or supplement the registration statement as filed, or the related
prospectus, prior to the effectiveness of the Registration Statement,
and will not effect such amendment or supplement without your consent,
which will not be unreasonably withheld; the Company will also advise
you promptly of the filing or effectiveness of any amendment or
supplement to the Registration Statement or the Prospectus, the receipt
of any comments from the Commission with respect to the Registration
Statement or the Prospectus or any amendment or supplement thereto, and
of receipt of notification of the institution by the Commission or any
state of any stop order proceedings in respect of the Registration
Statement or the initiation or threatening of any proceeding for such
purpose, and will use every reasonable
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<PAGE>
effort to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued. The Company will also notify
you promptly of any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information; the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to
the Registration Statement or the Prospectus which, in your opinion, may
be necessary or advisable in connection with the distribution of the
Notes; and the Company will not file any amendment or supplement to the
Registration Statement or the Prospectus or file any document under the
Exchange Act before the termination of the offering of the Notes by the
Underwriters if such document would be deemed to be incorporated by
reference into the Prospectus, which filing is not consented to by the
Underwriters after reasonable notice thereof, such consent not to be
unreasonably withheld or delayed.
(b) If, during such period of time after the first date of the
public offering of the Notes as in the opinion of counsel for the
Underwriters a prospectus relating to the Notes is required by law to be
delivered in connection with sales by an Underwriter or dealer, any
event occurs as a result of which the Prospectus as then amended or
supplemented would, in the judgment of the Underwriters and their
counsel, include an untrue statement of a material fact, or omit to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the
Act or any other law, subject to the requirements of paragraph (a) of
this Section 5, the Company promptly will prepare and file with the
Commission an amendment or supplement which will correct such statement
or omission or an amendment which will effect such compliance and will
notify you of such filing, and will prepare and provide to the
Underwriters pursuant to paragraph (c) of this Section 5, an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(c) The Company will make generally available to the Company's
security holders as soon as practicable an earning statement covering
the twelve month period ending September 30, 1997, that satisfies the
provisions of Section 11(a) of the Act and the Rules and Regulations
including, without limitation, Rule 158.
(d) The Company will deliver to you, free of charge, (i) as many
signed and conformed copies of the Registration Statement (as originally
filed) and of each amendment thereto (including exhibits filed therewith
or incorporated by reference therein) and of the Prospectus as you may
reasonably request and (ii) a conformed copy of the Registration
Statement and each amendment thereto for each of the Underwriters and
will also deliver to each Underwriter, free of charge, during the period
referred to in paragraph (b) of this Section 5, as many copies of the
Prospectus and any amendments and supplements thereto as such
Underwriter may reasonably request.
(e) The Company will arrange to qualify the Notes for offering and
sale under the applicable securities laws of such states and other
jurisdictions of the United States as the Underwriters may designate,
and will maintain such qualifications in effect for as long as
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may be required for the distribution of the Notes. The Company will
file such statements and reports as may be required by the laws of each
jurisdiction in which the Notes have been qualified as above provided.
(f) During the period of five years hereafter, the Company will
furnish to you and upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its
annual report to stockholders for such year, and the Company will
furnish to you (i) as soon as available, a copy of each report or
definitive proxy statement of the Company filed with the Commission
under the Exchange Act or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as you may
reasonably request.
(g) Until the termination of the offering of the Notes, the
Company shall timely file all documents and amendments to previously
filed documents required to be filed by it pursuant to Section 12, 13,
14 or 15(d) of the Exchange Act.
(h) The Company shall apply the net proceeds from the sale of the
Notes as set forth in the Prospectus.
(i) The Company will cooperate with you and use its best efforts
to permit the Notes to be eligible for clearance and settlement through
The Depository Trust Company.
(j) The Company will not, until [_____] days following the Closing
Date, without your prior written consent, offer, sell or contract to
sell in a public offering, or otherwise dispose of in a public offering,
directly or indirectly, or announce the public offering of, any debt
securities issued or guaranteed by the Company (other than the Notes).
SECTION 6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Notes on
the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein as of the date hereof and as of
the Closing Date with the same force and effect as if made as of that date,
to the accuracy of the statements of the Company made in any certificates
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective (or if
a post-effective amendment is required to be filed under the Act, such
post-effective amendment shall have become effective) not later than
5:00 p.m., New York time, on the date of this Agreement, or such later
time or date as shall have been consented to by you; and prior to the
Closing Date no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted, or to the knowledge of the
Company or you, shall be contemplated by the Commission.
(b) You shall not have advised the Company that the Registration
Statement or Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact
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<PAGE>
or omits to state a fact which, you have concluded, is material and
in the case of an omission is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) You shall have received a favorable opinion of Cotton,
Bledsoe, Tighe & Dawson, a Professional Corporation ("Counsel for the
Company"), dated the Closing Date to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
Delaware with full corporate power and authority to own, lease
and operate its properties and conduct its business as described
in the Registration Statement; and the Company is duly qualified
as a foreign corporation to transact business and, to the best of
such counsel's knowledge and information, is in good standing in
each jurisdiction which requires such qualification wherein it
owns or leases material properties or conducts material business
except where the failure to so qualify would not have a material
adverse effect on the properties, prospects, condition (financial
or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole.
(ii) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation
or limited liability company in good standing under the laws of
the jurisdiction of its formation, has corporate power and
authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement, and, to the
best of such counsel's knowledge and information, is duly
qualified as a foreign corporation or limited liability company to
transact business and is in good standing in each jurisdiction
which requires such qualification wherein it owns or leases
material properties or conducts material business except where the
failure to so qualify would not have a material adverse effect on
the properties, prospects, condition (financial or otherwise) or
results of operations of the Company and its subsidiaries taken as
a whole; all of the issued and outstanding capital stock or other
equity interest of each subsidiary has been duly authorized and
validly issued and is fully paid and non-assessable, and, except
as otherwise set forth in the Registration Statement, all of such
capital stock or other equity interest, to the best of such
counsel's knowledge and information, is owned by the Company,
directly or indirectly, free and clear of any mortgage, pledge,
lien, encumbrance, claim or equity.
(iii) All of the outstanding shares of capital stock of the
Company have been duly authorized and are validly issued, fully
paid and nonassessable. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering
or sale of the Notes as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any securities
of the Company or any of its subsidiaries, and, to the best of
such counsel's knowledge, no person or entity (other than the
Underwriters) has the right, contractual or otherwise, to cause
the Company to sell or otherwise issue to such person or entity,
or permit such person or entity to underwrite the sale
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of, any of the Notes. The authorized equity capitalization of the
Company as of the date of the most recent balance sheet included
or incorporated by reference in the Prospectus is as set forth in
the Prospectus, and the Notes conform as to legal matters to the
description thereof contained in the Prospectus. The Company has
all requisite corporate power and authority to issue, sell and
deliver the Notes in accordance with and upon the terms and
conditions set forth in this Agreement and in the Registration
Statement and Prospectus.
(iv) This Agreement has been duly authorized, executed and
delivered by the Company and each of the Subsidiary Guarantors.
(v) The Indenture has been duly authorized, executed and
delivered by the Company and each of the Subsidiary Guarantors and
duly qualified under the 1939 Act, and constitutes a legal, valid
and binding instrument enforceable against the Company and each of
the Subsidiary Guarantors in accordance with its terms (subject,
as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally from time to time in effect and to
general equitable principles).
(vi) The Notes have been duly and validly authorized and,
when executed and authenticated in accordance with the provisions
of the Indenture and delivered to and paid for by the Underwriters
pursuant to this Agreement, will constitute legal, valid and
binding obligations of the Company entitled to the benefits of the
Indenture (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting creditors' rights generally from time to time
in effect and to general equitable principles); and the statements
set forth under the heading "Description of Notes" in the
Prospectus, insofar as such statements purport to summarize
certain provisions of the Notes and the Indenture, provide a fair
summary of such provisions.
(vii) The Subsidiary Guarantees have been duly and validly
authorized and executed by the Subsidiary Guarantors, and, when
delivered in accordance with the terms of this Agreement, such
Subsidiary Guarantees will have been validly issued and delivered
and will constitute valid and binding obligations of the
Subsidiary Guarantors, enforceable against the Subsidiary
Guarantors in accordance with their terms (subject, as to the
enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors' rights
generally from time to time in effect and to general equitable
principles).
(viii) The Registration Statement is effective under the
Act and, to the best of such counsel's knowledge and information,
no stop order suspending the effectiveness of the Registration
Statement has been issued under the Act or proceedings therefor
initiated or threatened by the Commission. All required filings
by the Company under Rule 424(b) of the Rules and Regulations have
been timely made.
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<PAGE>
(ix) Statements set forth in the Prospectus under the
headings "Business and Properties--Regulation" and "Description
of Notes," in the Registration Statement, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein fairly present the information
called for with respect to such legal matters, documents and
proceedings.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the transactions contemplated by this Agreement,
except such as may be required under the Act, the 1939 Act, the
Rules and Regulations or state securities or Blue Sky laws and
such other approvals (specified in such opinion) as have been
obtained; and, to the best of such counsel's knowledge and
information, the execution and delivery of this Agreement, the
Notes and the Indenture and the consummation of the transactions
contemplated herein will not conflict with or constitute a breach
of, or default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound or to which any
of the property or assets of the Company or any of its
subsidiaries is subject; nor will such action result in any
violation of the provisions of the charter or by-laws of the
Company, or any law, administrative regulation or administrative
or court decree.
(xi) After due inquiry, such counsel does not know of any
legal or governmental proceeding pending or threatened to which
the Company or any of its subsidiaries is a party or to which
any of the properties of the Company is subject that is required
to be described in the Registration Statement or the Prospectus
and is not so described or of any contract or other document that
is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration
Statement that is not so described or filed as required.
(xii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
at the time the Registration Statement and each amendment thereto
became effective (except that no opinion need be expressed as to
the financial statements or notes thereto and other financial and
statistical data contained therein) and the Form T-1 complied as
to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations and the 1939 Act and the
rules and regulations thereunder.
Such opinion shall also contain a statement that such counsel
has no reason to believe that (i) the Registration Statement, as of the
Effective Time, or any amendment thereto (other than the engineering
data, financial statements and notes thereto and the other engineering,
financial and statistical data contained therein, as to which such counsel
need not comment), at the time it became effective, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the
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<PAGE>
statements therein not misleading, or (ii) the Prospectus or any supplement
or amendment thereto (other than the engineering data, financial statements
and notes thereto and the other engineering, financial and statistical data
contained therein, as to which such counsel need not comment), on such
Closing Date or at the time such Prospectus or supplement or amendment
thereto was issued contains or contained any untrue statement of a material
fact or omits or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) You shall have received from Counsel for the Underwriters such
opinion or opinions, dated the Closing Date, with respect to the issuance
and sale of the Notes, the Registration Statement and Prospectus (as
amended or supplemented at the Closing Date) and other related matters as
the Underwriters may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose
of enabling them to pass upon such matters.
(e) At the Closing Date there shall not have been, since the date
of this Agreement or since the respective dates as of which information is
given in the Registration Statement, any material adverse change in the
condition, financial or otherwise, earnings, business affairs or business
prospects of the Company and its subsidiaries considered as a whole,
whether or not arising in the ordinary course of business, except as set
forth in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto), and you shall have received a certificate of the
Company, signed by the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated the Closing
Date, to the foregoing effect, to the effect that the signers of such
certificate have carefully examined the Prospectus, any amendment or
supplement to the Prospectus and this Agreement, and to the further effect
that (i) the representations and warranties of the Company contained in
this Agreement are true and correct on and as of the Closing Date with the
same force and effect as though expressly made on and as of the Closing
Date, (ii) the Company has performed or complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to the Closing Date and (iii) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission or any state.
(f) You shall have received from KPMG Peat Marwick, LLP, independent
public accountants, two letters, the first delivered concurrently with the
execution of, and dated the date of, this Agreement and the other dated the
Closing Date, addressed to the Underwriters (with conformed copies for each
of the Underwriters), in form and substance satisfactory to you, to the
effect that:
(i) They are independent public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
Rules and Regulations.
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<PAGE>
(ii) In their opinion, the consolidated financial statements and
supporting schedules of the Company and its subsidiaries and of the
properties acquired by the Company in certain material transactions in
1995 and 1996 examined by them and included or incorporated by
reference in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Rules and Regulations with respect to registration
statements on Form S-1 and the Exchange Act and the rules and
regulations promulgated thereunder (the "Exchange Act Regulations").
(iii) They have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial statements of the Company and its indicated subsidiaries, a
reading of the minute books of the Company and such subsidiaries since
the end of the most recent fiscal year with respect to which an audit
report has been issued, inquiries of and discussions with certain
officials of the Company and such subsidiaries responsible for
financial and accounting matters with respect to the unaudited
consolidated financial statements included in the Registration
Statement and Prospectus and the latest available interim unaudited
financial statements of the Company and its subsidiaries in accordance
with Statement of Financial Accounting Standards No. 71, and such other
inquiries and procedures as may be specified in such letters, and on
the basis of such inquiries and procedures nothing came to their
attention that caused them to believe that: (A) the unaudited
consolidated financial statements of the Company and its subsidiaries
included in the Registration Statement and Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Exchange Act and the Exchange Act Regulations or
were not fairly presented in conformity with generally accepted
accounting principles in the United States applied on a basis
substantially consistent with that of the audited financial statements
included or incorporated by reference therein, or (B) at a specified
date not more than five days prior to the date of such letters, there
was any change in the consolidated capital stock or any increase in
consolidated long-term debt of the Company and its subsidiaries or any
decrease in the consolidated net current assets or members' capital of
the Company and its subsidiaries or any increases or decreases in any
other items specified by the Underwriters, in each case as compared
with the amounts shown on the most recent balance sheet of the Company
and its subsidiaries included or incorporated by reference in the
Registration Statement and Prospectus or, during the period from the
date of such balance sheet to a specified date not more than five days
prior to the date of such letters, there were any decreases, as
compared with the corresponding period in the preceding year, in
consolidated net revenues or the total or per share amounts of
consolidated net income of the Company and its subsidiaries or any
increases or decreases in any other items specified by the
Underwriters, except in each such case as set forth in or contemplated
by the Registration Statement and Prospectus or except for such
exceptions enumerated in such letters as shall have been agreed to by
the Underwriters and the Company.
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<PAGE>
(iv) In addition to the examination referred to in their report
included or incorporated by reference in the Registration Statement
and the Prospectus, and the specified procedures referred to in clause
(iii) above, they have carried out certain other specified procedures,
not constituting an audit, with respect to certain amounts, percentages
and financial information which are included in the Registration
Statement and Prospectus and which are specified by the Underwriters,
and have found such amounts, percentages and financial information to
be in agreement with the relevant accounting and financial records of
the Company and its subsidiaries identified in such letters.
(v) On the basis of a reading of the unaudited pro forma
financial statements included in the Registration Statement and
Prospectus; carrying out certain specified procedures; inquiries of
certain officials of the Company and Parker & Parsley Development L.P.
and its affiliates who have responsibility for financial and accounting
matters; and proving the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the pro forma
financial statements, nothing came to their attention which caused them
to believe that the pro forma financial statements do not comply in
form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of such statements.
(g) At the Closing Date, counsel for the Underwriters shall have
been furnished with such other documents and opinions as they may
reasonably require.
(h) At the time of the Closing, the Notes shall have a rating of at
least _____ by Moody's Investors Service, Inc. and _____ by Standard &
Poor's Rating Service, and the Company shall have delivered to the
Underwriters a letter, dated the Closing Date, from each such rating agency
or other evidence satisfactory to the Underwriters, confirming such
ratings. Since the Effective Date, there shall not have occurred any
downgrading with respect to any debt securities of the Company or any of
its Subsidiaries by any "nationally recognized statistical rating
organization" as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act or any public announcement that any such
organization has under surveillance or review its rating of any such debt
securities (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading of such
rating).
(i) On or prior to the Closing Date, the closing contemplated
pursuant to the Stock Offering shall have occurred.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory in form
and substance to you and to counsel for the Underwriters. The Company shall
furnish to you conformed copies of such opinions, certificates, letters and
other documents in such number as you shall reasonably request. If any of
the conditions specified in this Section 6 shall not have been fulfilled when
and as required by this Agreement, this
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Agreement and all obligations of the Underwriters hereunder may be canceled
at, or at any time prior to, the Closing Date, by you. Any such cancellation
shall be without liability of the Underwriters to the Company. Notice of
such cancellation shall be given to the Company in writing, or by telegraph
or telephone and confirmed in writing.
SECTION 7. PAYMENT OF EXPENSES. The Company will pay all costs,
expenses, fees and taxes incident to (i) the preparation by the Company,
printing, filing and distribution under the Act of the Registration Statement
(including financial statements and exhibits), the Prospectus, each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in Section 5(b) (including, without
limitation, the deliveries thereof pursuant to Section 5(d)), (ii) the
preparation, printing (including word processing and duplication costs) and
delivery of this Agreement, the Indenture, the Statement of Eligibility and
Qualification of the Trustee on Form T-1, Preliminary and Supplemental Blue
Sky Memoranda, the Notes and all other agreements, memoranda, correspondence
and other documents printed and delivered in connection with the offering of
the Notes, (iii) the registration with the Commission and the issuance by the
Company of the Notes (iv) the registration or qualification of the Notes for
offer and sale under the securities or Blue Sky laws of the several states as
described in Section 5(e) (including the reasonable fees and disbursements of
your counsel relating to such registration or qualification), (v) any fees or
expenses relating to the use of book-entry notes, (vi) the fees, costs and
charges of the Trustee, including the fees and disbursements of counsel for
the Trustee, (vii) the fees and expenses of rating agencies, and (viii) all
other costs and expenses incident to the performance by the Company of its
other obligations under this Agreement.
If the sale of the Notes provided for herein is not consummated because
any condition to the obligations of the Underwriters set forth in Section 6
hereof is not satisfied, because of any termination pursuant to Section 10
hereof or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof
other than by reason of default by any of the Underwriters in payment for the
Notes on the Closing Date, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Notes.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company and
each of the Subsidiary Guarantors, jointly and severally, agree to
indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities or judgments (including without limiting the
foregoing the reasonable legal and other expenses incurred in connection
with investigating or defending any action, suit or proceeding or any claim
asserted) arising out of or based upon any untrue statement or alleged
untrue statement in Section 2 hereof or any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
or the Prospectus or any preliminary prospectus or in any amendment or
supplement thereto, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
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<PAGE>
claims, damages, liabilities or expenses are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Company by any Underwriter through
you expressly for use therein; and shall reimburse each Underwriter
promptly after receipt of invoices from such Underwriter for any legal or
other expenses as reasonably incurred by such Underwriter in connection
with investigating, preparing to defend or defending against or appearing
as a third-party witness in connection with any such loss, claim, damage,
liability or action, notwithstanding the possibility that payments for such
expenses might later be held to be improper, in which case such payments
shall be promptly refunded. This indemnity agreement will be in addition
to any liability which the Company may otherwise have to the persons
referred to above in this Section 8(a).
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of the Subsidiary Guarantors,
the directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Company by or on behalf of
such Underwriter through you specifically for inclusion in the Registration
Statement, the Prospectus, any amendment or supplement thereto, or any
preliminary prospectus.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than
the indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for
the fees and expense or any separate counsel retained by the indemnified
party or parties except as set forth below); PROVIDED, HOWEVER, that such
counsel shall be satisfactory to the indemnified party. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall have the right
to employ separate counsel (including local counsel), and the indemnifying
party shall bear the reasonable fees, costs and expenses of such separate
counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict
of interest, (ii) the actual or potential defendants in, or targets of, any
such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel satisfactory
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<PAGE>
to the indemnified party to represent the indemnified party within a
reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters agree
to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the
Company and the Subsidiary Guarantors on the one hand and one or more of
the Underwriters on the other hand may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company
and by the Underwriters from the offering of the Notes; PROVIDED, HOWEVER,
that in no case shall any Underwriter (except as may be provided in any
agreement among the Underwriters relating to the offering of the Notes) be
responsible for any amount in excess of the purchase discount or commission
applicable to the Notes purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable
for any reason, the Company and the Subsidiary Guarantors on the one hand
and the Underwriters on the other hand shall contribute in such proportion
as is appropriate to reflect not only such relative benefits but also the
relative fault of the Company and of the Underwriters in connection with
the statements or omissions which resulted in such Losses as well as any
other relevant equitable considerations. Benefits received by the Company
and the Subsidiary Guarantors shall be deemed to be equal to the total net
proceeds from the offering (before deducting expenses), and benefits
received by the Underwriters shall be deemed to be equal to the total
purchase discounts and commissions received by the Underwriters from the
Company in connection with the purchase of the Notes hereunder. Relative
fault shall be determined by reference to whether any alleged untrue
statement or omission relates to information provided by the Company or the
Underwriters. The Company and the Underwriters agree that it would not be
just and equitable if contribution were determined by pro rata allocation
or any other method of allocation which does not take into account of the
equitable considerations referred to above. Notwithstanding the provisions
of this paragraph (d), no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person who controls
an Underwriter within the meaning of either the Act or the Exchange Act and
each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who
controls the Company within the meaning of either the Act or Exchange Act
and each officer and director of the
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Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (d).
(e) The Company and each of the Subsidiary Guarantors also agrees
to indemnify and hold harmless Prudential Securities Incorporated and each
person, if any, who controls Prudential Securities Incorporated within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and
judgments incurred as a result of Prudential Securities Incorporated's
participation as a "qualified independent underwriter" within the meaning of
Section b(15) of Rule 2720 in connection with the offering of the Notes,
except for any losses, claims, damages, liabilities and judgments resulting
from Prudential Securities Incorporated's, or such controlling person's,
willful misconduct or gross negligence.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers and of the
Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf
of the Underwriters or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive
delivery of and payment for the Securities. The provisions of Sections 7 and
8 hereof shall survive the termination or cancellation of this Agreement.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon later of (x) execution and delivery hereof by the
parties hereto and (y) release of notification of the effectiveness of the
Registration Statement by the Commission.
This Agreement may be terminated for any reason at any time prior to
the Closing Date by NationsBanc Capital Markets, Inc., in its absolute
discretion, upon the giving of written notice of such termination to the
Company, if at or prior to the Closing Date (i) the Company shall have
failed, refused or been unable to perform any agreement on its part to be
performed hereunder, (ii) any other condition of the Underwriters' obligation
hereunder is not fulfilled, (iii) there has been, since the respective dates
as of which information is given in the Registration Statement, any material
adverse change in the condition, financial or otherwise, earnings, business
affairs or business prospects of the Company and its subsidiaries considered
as a whole, whether or not arising in the ordinary course of business, (iv)
there has occurred any outbreak or escalation of hostilities or other
calamity or crisis or material change in existing financial, political,
economic or securities market conditions, the effect of which is such as to
make it, in the judgment of NationsBanc Capital Markets, Inc., impracticable
or inadvisable to market the Notes in the manner contemplated in the
Prospectus or enforce contracts for the sale of the Notes, (v) reporting of
bid and asked prices has been suspended by the Commission or by the National
Association of Securities Dealers, Inc. or trading generally on either the
American Stock Exchange or the New York Stock Exchange has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by either of said exchanges or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by Federal, New York or Delaware authorities or
(vi) if there shall have come to the attention of the Underwriters any facts
that would cause the Underwriters to believe that the Prospectus, at the time
it was required to
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be delivered to a purchaser of Notes, included an untrue statement of a
material fact or omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time of
such delivery, not misleading. In the event of any such termination, the
provisions of Section 7, the indemnity agreement and contribution provisions
set forth in Section 8, and the provisions of Sections 9 and 14 shall remain
in effect.
SECTION 11. DEFAULT. If, on the Closing Date, any one or more
Underwriters shall fail to purchase and pay for any of the Notes agreed to be
purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be
obligated severally to take up and pay for (in the respective proportions
which the principal amount of Notes set forth opposite their names in
Schedule I hereto bears to the aggregate principal amount of Notes set forth
opposite the names of all the remaining Underwriters) the Notes which the
defaulting Underwriter or Underwriters agreed but failed to purchase;
PROVIDED, HOWEVER, that in the event that the aggregate principal amount of
Notes which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate principal amount of Notes set
forth in Schedule I hereto, the remaining Underwriters shall have the right
to purchase all, but shall not be under any obligation to purchase any, of
the Notes, and if such non-defaulting Underwriters do not purchase all the
Notes, this Agreement will terminate without liability to any non-defaulting
Underwriter or the Company. In the event of a default by any Underwriter as
set forth in this Section 11, the Closing Date shall be postponed for such
period, not exceeding seven days, as you shall determine in order that the
required changes in the Registration Statement and in the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Company or any non-defaulting Underwriter for damages occasioned
by its default hereunder.
SECTION 12. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to you c/o NationsBanc Capital Markets,
Inc., 100 North Tryon Street, Charlotte, North Carolina 28255; Attention:
Syndicate; notices to the Company shall be directed to it at Costilla Energy,
Inc., 400 West Illinois, Suite 1000, Midland, Texas 79701, to the attention
of the Secretary with copy to the President.
SECTION 13. PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Company, the Underwriters, any controlling persons
referred to herein and their respective successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person, firm or corporation any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the parties hereto and
respective successors and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Notes from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
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SECTION 14. APPLICABLE LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
SECTION 15. BUSINESS DAY. For purposes of this Agreement,
"business day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York, New
York are authorized or obligated by law, executive order or regulation to
close.
SECTION 16. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which will be deemed to be an original, but all
such counterparts will together constitute one and the same instrument.
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If the foregoing is in accordance with your understanding of our
agreement, please sign this Agreement and return a counterpart hereof to us,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters, the Subsidiary Guarantors and the Company
in accordance with its terms.
Very truly yours,
COSTILLA ENERGY, INC.
By:
--------------------------------------
Name:
Title:
[SUBSIDIARY GUARANTORS]
By:
--------------------------------------
Name:
Title:
Confirmed and Accepted, as of
the date first above written:
NATIONSBANC CAPITAL MARKETS, INC.
PRUDENTIAL SECURITIES INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named herein.
By: NATIONSBANC CAPITAL MARKETS, INC.
By:
--------------------------------------
Name:
Title:
[For themselves and the other
Underwriters named in Schedule I
to the foregoing Agreement]
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SCHEDULE I
PRINCIPAL AMOUNT
OF NOTES
UNDERWRITER TO BE PURCHASED
- ----------- ----------------
NationsBanc Capital Markets, Inc.. . . . . . . . . . . . . . . $
Prudential Securities Incorporated . . . . . . . . . . . . . .
---------
Total. . . . . . . . . . . . . . . . . . . . $
---------
---------
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
COSTILLA ENERGY, INC.
ARTICLE I
NAME
The name of the corporation is COSTILLA ENERGY, INC. (the "Corporation").
ARTICLE II
PERIOD OF DURATION
The period of duration of the Corporation is perpetual or until dissolved
or merged or consolidated in some lawful manner.
ARTICLE III
PURPOSE AND POWERS
Section 1. PURPOSE. The purpose for which the Corporation is organized is
to engage in any lawful acts or activities for which corporations may be
organized under the General Corporation Law of the State of Delaware (the
"Act").
Section 2. POWERS. Subject to any specific written limitations or
restrictions imposed by the Act, by other law, or by this Certificate of
Incorporation, and solely in furtherance of, but not in addition to, the
purposes set forth in Section 1 of this Article, the Corporation shall have and
exercise all of the powers specified in the Act which are not inconsistent with
this Certificate of Incorporation.
ARTICLE IV
CAPITALIZATION, PREEMPTIVE RIGHTS AND VOTING
Section 1. AUTHORIZED SHARES. The aggregate number of shares of capital
stock which the Corporation shall have authority to issue is Twenty-Three
Million (23,000,000), of which (i) Twenty Million (20,000,000) shall be common
stock, par value $.10 per share; and (ii) three Million (3,000,000) shall be
preferred stock par value, $.10 per share.
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The preferred stock may be issued in one or more series, from time to time,
at the discretion of the Board of Directors without stockholder approval, with
each such series to consist of such number of shares and to have such voting
powers (whether full or limited, or no voting powers) and such designations,
powers, preferences and relative, participating, optional, redemption,
conversion, exchange or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be stated in the resolution or
resolutions providing for the issuance of such series adopted by the Board of
Directors, and the Board of Directors is hereby expressly vested with the
authority, to the full extent now or hereafter provided by law, to adopt any
such resolution or resolutions. Upon adoption of such resolution or
resolutions, a Certificate of Designations shall be prepared and filed in
accordance with the Act. Each share of any series of preferred stock shall be
identical with all other shares of such series, except as to the date from which
dividends, if any, shall accrue.
Section 2. PREEMPTIVE RIGHTS. No holder of shares of capital stock of the
Corporation shall, as such holder, have any right to purchase or subscribe for
any capital stock of any class which the Corporation may issue or sell, whether
or not exchangeable for any capital stock of the Corporation of any class or
classes, whether issued out of unissued shares authorized by this Certificate of
Incorporation as originally filed or by any amendment hereof, or out of shares
of capital stock of the Corporation acquired by it after the issue thereof; nor
shall any holder of shares of capital stock of the Corporation, as such holder,
have any right to purchase, acquire or subscribe for any securities which the
Corporation may issue or sell whether or not convertible into or exchangeable
for shares of capital stock of the Corporation of any class or classes, and
whether or not any such securities have attached or are appurtenant to warrants,
options or other instruments which entitle the holders thereof to purchase,
acquire or subscribe for shares of capital stock of any class or classes.
Section 3. VOTING. In the exercise of voting privileges, each holder of
shares of the common stock of the Corporation shall be entitled to one (1) vote
for each share held in his name on the books of the Corporation, and each holder
of any series of preferred stock of the Corporation shall have such voting
rights, if any, as shall be specified for such series. In all elections of
directors of the Corporation, cumulative voting is expressly prohibited and
directors will be elected by a plurality of votes of shares entitled to vote
thereon and represented at a meeting of the stockholders at which a quorum is
present. With respect to any action to be taken by the stockholders of the
Corporation as to any matter other than the election of directors and except as
otherwise required by law, the affirmative vote of the holders of a majority of
the shares of the capital stock of the Corporation entitled to vote thereon and
represented in person or by proxy at a meeting of the stockholders at which a
quorum is present shall be sufficient to authorize, affirm, ratify or consent to
such action. Any action required by the Act to be, or which may be, taken at
any annual or special meeting of the stockholders may be taken without a
meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or to take such action at a meeting at
which all shares of the capital stock of the Corporation entitled to vote
thereon were present and voted and shall be delivered to the Corporation by
delivery to its
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registered office in Delaware, its principal place of business or an officer
or agent of the Corporation having custody of the Corporation's minute book,
and notice of such action shall be sent to all stockholders not signing a
consent.
ARTICLE V
REGISTERED OFFICE AND AGENT
The street address of the initial registered office of the Corporation is
1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and the name
of its initial registered agent at such address is The Corporation Trust
Company.
ARTICLE VI
DIRECTORS
Section 1. NUMBER AND CLASSIFICATION. The business and affairs of the
Corporation shall be managed by or be under the direction of the Board of
Directors which shall consist of not less than one (1) director, the exact
number of which shall be determined in accordance with the Bylaws of the
Corporation. The directors shall be divided into three classes, designated
Class I, Class II and Class III. Initially, Class I directors shall be elected
for a term extending until the first annual meeting of stockholders, Class II
directors shall be elected for a term extending until the second annual meeting
of stockholders and Class III directors shall be elected for a term extending
until the third annual meeting of stockholders. At each annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for a term expiring at the third succeeding
annual meeting of stockholders or until their respective successors are in each
case elected and qualified. If the number of directors is changed, any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filing of
vacancies and other features of such directorships shall be governed by the
terms of the Certificate of Designations applicable thereto, and such directors
so elected shall not be divided into classes pursuant to this Article VI unless
expressly provided by such terms.
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Further, any such directors elected by one or more classes or series of
preferred stock may be removed at any time, with or without cause, only by
the affirmative vote of the holders of record of a majority of the
outstanding shares of such class or series given at a special meeting of such
stockholders called for such purpose.
Section 2. LIMITATION ON LIABILITY OF DIRECTORS. Pursuant to Section
102(b)(7) of the Act, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages from breach
of fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) under Section 174 of the Act; or (4) for any
transaction from which the director derived an improper personal benefit. If
the Act or other applicable provision of Delaware law hereafter is amended to
authorize further elimination or limitation of the liability of directors, then
the liability of a director of this Corporation, in addition to the limitation
on personal liability provided herein, shall be limited to the fullest extent
permitted by the Act or other applicable provision of Delaware law as amended.
Any repeal or modification of this Section 3 by the stockholders of this
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
Section 3. ELECTION AND REMOVAL OF DIRECTORS. Election of directors need
not be by written ballot. Any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, except as otherwise provided by
law.
ARTICLE VII
SPECIAL POWERS OF BOARD OF DIRECTORS
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
1. To adopt, amend or repeal the Bylaws of the Corporation;
2. To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation;
3. To set apart out of any of the funds of the Corporation available for
dividends a reserve or reserves for any proper purpose, and to abolish any such
reserve in the manner in which it was created;
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4. By a majority of the whole board, to designate one or more committees,
each committee to consist of two or more of the directors of the Corporation;
the board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee; any such committee, to the extent provided in the resolution or
in the Bylaws of the Corporation, shall have and may exercise any or all of the
powers of the Board of Directors in the management of the business and affairs
of the Corporation, except to the extent that the Act requires a particular
matter to be authorized by the Board of Directors, and may authorize the seal of
the Corporation to be affixed to all papers which may require it; and the
Bylaws may provide that in the absence or disqualification of any member of the
committee or committees, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member;
5. When and as authorized by the affirmative vote of the holders of a
majority of the stock issued and outstanding having voting power given at a
stockholders meeting duly called upon such notice as is required by statute, or
when authorized by the written consent of the holders of a majority of the
voting stock issued and outstanding, to sell, lease or exchange all or
substantially all of the property and assets of the Corporation, including its
good will and its corporate franchises, upon such terms and conditions and for
such consideration, which may consist in whole or in part of money or property,
including shares of stock in, and/or other securities of, any other corporation
or corporations, as the Board of Directors shall deem expedient and in the best
interests of the Corporation; and
6. Except as specifically provided in the Act, to determine, from time to
time, whether and to what extent and at what times and places and under what
conditions and provisions the accounts and books of the Corporation shall be
maintained and made available for inspection by any stockholder; no stockholder
shall have any right to inspect any account or books or records of the
Corporation, except as provided in the Act or authorized by the Board of
Directors.
ARTICLE VIII
ADDITIONAL POWERS IN BYLAWS
The Corporation may in its Bylaws confer powers and authorities upon the
Board of Directors in addition to the foregoing and those expressly conferred
upon the board by the Act.
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ARTICLE IX
INDEMNIFICATION
Section 1. MANDATORY INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. To the
fullest extent permitted by the Act and other applicable law, each person who
was or is made a party or is threatened to be made a party to or is involved in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such
action, suit or proceeding, and any inquiry or investigation that could lead to
such an action, suit, or proceeding ("Proceeding"), by reason of the fact that
he is or was an officer or a director of the Corporation, or who, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise, shall be indemnified and held harmless by the Corporation against
all judgments, penalties (including excise and similar taxes), fines,
settlements, and reasonable expenses (including attorneys' fees) actually
incurred by such person in connection with such Proceeding. Such right shall be
a contract right and shall include, to the fullest extent permitted by the Act
and other applicable law, the right to require advancement by the Corporation of
reasonable expenses (including attorneys' fees) incurred in defending any such
Proceeding in advance of its final disposition; provided, however, that the
payment of such expenses in advance of the final disposition of such Proceeding
shall be made by the Corporation only upon delivery to the Corporation of a
written affirmation by such person of his good faith belief that he has met the
standard of conduct necessary for indemnification under the Act and a written
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it should be ultimately determined that such person has not satisfied such
requirements.
Section 2. NATURE OF INDEMNIFICATION. The indemnification and advancement
of expenses provided for herein shall not be deemed exclusive of any other
rights permitted by law to which a person seeking indemnification may be
entitled under any Bylaw, agreement, vote of stockholders or otherwise, and
shall continue as to a person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 3. INSURANCE. To the fullest extent permitted by the Act and
other applicable law, the Corporation shall have power to purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article or the Act.
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ARTICLE X
ARRANGEMENT WITH CREDITORS
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of the Act, or on the application of trustees in dissolution or of
any receiver or receivers appointed for this Corporation under the provisions of
Section 279 of the Act, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such a manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or class
of creditors, and/or the holders of a majority of shares or any class of shares
of capital stock of this Corporation outstanding and entitled to vote thereon,
as the case may be, agree to any compromise or arrangement and to any
reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE XI
TRANSACTIONS WITH INTERESTED PARTIES
No contract or other transaction between the Corporation and any other
corporation and no other acts of the Corporation with relation to any other
corporation shall, in the absence of fraud, in any way be invalidated or
otherwise affected by the fact that any one or more of the directors or officers
of the Corporation are pecuniarily or otherwise interested in, or are directors
or officers of, such other corporation. Any director or officer of the
Corporation individually, or any firm or association of which any director or
officer may be a member, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation, provided that the
fact that he individually or as a member of such firm or association is such a
party or is so interested shall be disclosed or shall have been known to the
Board of Directors or a majority of such members thereof as shall be present at
any meeting of the Board of Directors at which action upon any such contract or
transaction shall be taken; and any director of the Corporation who is also a
director or officer of such other corporation or who is such a party or so
interested may be counted in determining the existence of a quorum at any
meeting of the Board of Directors which shall authorize any such contact or
transaction and may vote thereat to authorize any such contract or transaction,
subject to such limitations as are imposed by the Act or other applicable law.
Any director of the Corporation may vote upon any contract or any other
transaction between the Corporation and any subsidiary or
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affiliated corporation without regard to the fact that he is also a director
or officer of such subsidiary or affiliated corporation.
Any contract, transaction, act of the Corporation or of the directors,
which shall be ratified at any annual meeting of the stockholders of the
Corporation or at any special meeting of the stockholders of the Corporation
shall, insofar as permitted by law, be as valid and as binding as though
ratified by every stockholder of the Corporation; PROVIDED, HOWEVER, that any
failure of the stockholders to approve or ratify any such contract, transaction
or act, when and if submitted, shall not be deemed in any way to invalidate the
same or deprive the Corporation, its directors, officers or employees, of its or
their right to proceed with such contract, transaction or act.
ARTICLE XII
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation or in its Bylaws in
the manner now or hereafter prescribed by the Act or this Certificate of
Incorporation, and all rights conferred on stockholders herein are granted
subject to this reservation. The Bylaws of the Corporation, or any provision
thereof, may be adopted, amended or repealed by the Board of Directors at any
meeting or by the stockholders at any meeting.
ARTICLE XIII
INCORPORATOR
The incorporator is Stephen C. Byrd, whose mailing address is 500 West
Illinois, Suite 300, Midland, Texas 79701.
ARTICLE XIV
The power of the incorporator shall terminate upon the filing of this
Certificate of Incorporation and the names and mailing addresses of persons who
are to serve as directors until the first annual meeting of stockholders or
until their successors are elected and qualified:
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NAME MAILING ADDRESS
Cadell S. Liedtke 400 West Illinois, Suite 1000
Midland, Texas 79701
Michael J. Grella 400 West Illinois, Suite 1000
Midland, Texas 79701
Henry G. Musselman 400 West Illinois, Suite 1000
Midland, Texas 79701
I, the undersigned, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, to certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 25TH day of June, 1996.
/s/ STEPHEN C. BYRD
--------------------------------------
Stephen C. Byrd
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EXHIBIT 3.2
TABLE OF CONTENTS
CORPORATE BYLAWS OF
COSTILLA ENERGY, INC.
(A Delaware corporation)
SECTION SUBJECT MATTER PAGE
- ------- -------------- ----
ARTICLE 1: NAME AND OFFICES
1.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Registered Office and Agent . . . . . . . . . . . . . . . . . . . . .1
(a) Registered Office. . . . . . . . . . . . . . . . . . . . .1
(b) Registered Agent . . . . . . . . . . . . . . . . . . . . .1
(c) Change of Registered Office or Agent . . . . . . . . . . .1
1.3 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2: STOCKHOLDERS
2.1 Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.4 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.5 Voting List . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.7 Requisite Vote. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Withdrawal of Quorum. . . . . . . . . . . . . . . . . . . . . . . . .4
2.9 Voting at Meetings. . . . . . . . . . . . . . . . . . . . . . . . . .4
(a) Voting Power . . . . . . . . . . . . . . . . . . . . . . .4
(b) Exercise of Voting Power; Proxies. . . . . . . . . . . . .4
(c) Election of Directors. . . . . . . . . . . . . . . . . . .5
2.10 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.11 Action Without Meetings . . . . . . . . . . . . . . . . . . . . . . .5
2.12 Record Date for Action Without Meeting. . . . . . . . . . . . . . . .6
2.13 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE 3: DIRECTORS
3.1 Management Powers . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.2 Number and Qualification. . . . . . . . . . . . . . . . . . . . . . .7
3.3 Classification of Directors . . . . . . . . . . . . . . . . . . . . .8
3.4 Election and Terms. . . . . . . . . . . . . . . . . . . . . . . . . .8
(i)
<PAGE>
3.5 Voting on Directors . . . . . . . . . . . . . . . . . . . . . . . . .8
3.6 Vacancies and New Directorships . . . . . . . . . . . . . . . . . . .9
3.7 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.8 Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Place. . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Annual Meetings. . . . . . . . . . . . . . . . . . . . . 10
(c) Regular Meetings . . . . . . . . . . . . . . . . . . . . 10
(d) Special Meetings . . . . . . . . . . . . . . . . . . . . 10
(e) Notice and Waiver of Notice. . . . . . . . . . . . . . . 10
(f) Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 10
(g) Requisite Vote . . . . . . . . . . . . . . . . . . . . . 10
3.9 Action Without Meetings . . . . . . . . . . . . . . . . . . . . . . 11
3.10 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Designation and Appointment. . . . . . . . . . . . . . . 11
(b) Members; Alternate Members; Term . . . . . . . . . . . . 11
(c) Authority. . . . . . . . . . . . . . . . . . . . . . . . 11
(d) Records. . . . . . . . . . . . . . . . . . . . . . . . . 11
(e) Change in Number . . . . . . . . . . . . . . . . . . . . 11
(f) Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 11
(g) Removal. . . . . . . . . . . . . . . . . . . . . . . . . 12
(h) Meetings . . . . . . . . . . . . . . . . . . . . . . . . 12
(i) Quorum; Requisite Vote . . . . . . . . . . . . . . . . . 12
(j) Compensation . . . . . . . . . . . . . . . . . . . . . . 12
(k) Action Without Meeting . . . . . . . . . . . . . . . . . 12
(l) Responsibility . . . . . . . . . . . . . . . . . . . . . 12
3.11 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.12 Maintenance of Records. . . . . . . . . . . . . . . . . . . . . . . 13
3.13 Interested Directors and Officer. . . . . . . . . . . . . . . . . . 13
ARTICLE 4: NOTICES
4.1 Method of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 5: OFFICERS AND AGENTS
5.1 Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 Election of Officers. . . . . . . . . . . . . . . . . . . . . . . . 15
5.3 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.4 Term of Office. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.5 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.6 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.7 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.8 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.9 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . 16
(ii)
<PAGE>
5.10 Vice Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.11 Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . 17
5.12 Chief Operating Officer . . . . . . . . . . . . . . . . . . . . . . 17
5.13 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.14 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.15 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.16 Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . 19
5.17 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.18 Assistant Treasurers. . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 6: INDEMNIFICATION
6.1 Mandatory Indemnification . . . . . . . . . . . . . . . . . . . . . 20
6.2 Determination of Indemnification. . . . . . . . . . . . . . . . . . 22
6.3 Advance of Expenses . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Permissive Indemnification. . . . . . . . . . . . . . . . . . . . . 23
6.5 Nature of Indemnification . . . . . . . . . . . . . . . . . . . . . 23
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.7 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 7: STOCK CERTIFICATES AND TRANSFER REGULATIONS
7.1 Description of Certificates . . . . . . . . . . . . . . . . . . . . 25
7.2 Entitlement to Certificates . . . . . . . . . . . . . . . . . . . . 25
7.3 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.4 Issuance of Certificates. . . . . . . . . . . . . . . . . . . . . . 26
7.5 Payment for Shares. . . . . . . . . . . . . . . . . . . . . . . . . 26
(a) Consideration. . . . . . . . . . . . . . . . . . . . . . 26
(b) Valuation. . . . . . . . . . . . . . . . . . . . . . . . 27
(c) Effect . . . . . . . . . . . . . . . . . . . . . . . . . 27
(d) Allocation of Consideration. . . . . . . . . . . . . . . 27
7.6 Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.7 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.8 Registered Owners . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.9 Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . . . . 28
(a) Proof of Loss. . . . . . . . . . . . . . . . . . . . . . 28
(b) Timely Requests. . . . . . . . . . . . . . . . . . . . . 29
(c) Bond . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(d) Other Requirements . . . . . . . . . . . . . . . . . . . 29
7.10 Registration of Transfers . . . . . . . . . . . . . . . . . . . . . 29
(a) Endorsement. . . . . . . . . . . . . . . . . . . . . . . 29
(b) Guaranry and Effectiveness of Signature. . . . . . . . . 29
(c) Adverse Claim. . . . . . . . . . . . . . . . . . . . . . 29
(d) Collection of Taxes. . . . . . . . . . . . . . . . . . . 30
(e) Additional Requirements Satisfied. . . . . . . . . . . . 30
(iii)
<PAGE>
7.11 Restrictions on Transfers and Legends on Certificates . . . . . . . 30
(a) Shares in Classes or Series. . . . . . . . . . . . . . . 30
(b) Restriction on Transfer. . . . . . . . . . . . . . . . . 30
(c) Unregistered Securities. . . . . . . . . . . . . . . . . 30
ARTICLE 8: GENERAL PROVISIONS
8.1 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(a) Declaration and Payment. . . . . . . . . . . . . . . . . 31
(b) Record Date. . . . . . . . . . . . . . . . . . . . . . . 31
8.2 Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.3 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.4 Annual Statements . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.5 Contracts and Negotiable Instruments. . . . . . . . . . . . . . . . 32
8.6 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.7 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.8 Resignations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8,9 Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 33
8.10 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.11 Telephone Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 34
8.12 Table of Contents; Captions . . . . . . . . . . . . . . . . . . . . 34
(iv)
<PAGE>
CORPORATE BYLAWS
OF
COSTILLA ENERGY, INC.
(a Delaware Corporation)
ARTICLE 1
NAME AND OFFICES
----------------
1.1 NAME. The name of the Corporation is COSTILLA ENERGY, INC.,
hereinafter referred to as the "Corporation."
1.2 REGISTERED OFFICE AND AGENT. The Corporation shall establish,
designate and continuously maintain a registered office and agent in the State
of Delaware, subject to the following provisions:
(a) REGISTERED OFFICE. The Corporation shall establish and
continuously maintain in the State of Delaware a registered office which
may be, but need not be, the same as its place of business.
(b) REGISTERED AGENT. The Corporation shall designate and
continuously maintain in the State of Delaware a registered agent, which
may be either an individual resident of the State of Delaware whose
business office is identical with such registered office, or a domestic
corporation or a foreign corporation authorized to transact business in the
State of Delaware, having a business office identical with such registered
office.
(c) CHANGE OF REGISTERED OFFICE OR AGENT. The Corporation may
change its registered office or change its registered agent, or both, upon
the filing in the Office of the Secretary of State of Delaware of a
statement setting forth the facts required by law, and executed for the
Corporation by its President, a Vice President or other duly authorized
officer.
1.3 OTHER OFFICES. The Corporation may also have other registered agents
and registered offices at such other places outside the State of Delaware as the
Board of Directors may, from time to time, determine that the business of the
Corporation requires.
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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ARTICLE 2
STOCKHOLDERS
------------
2.1 PLACE OF MEETINGS. Each meeting of the stockholders of the
Corporation is to be held at the principal offices of the Corporation or at such
other place, either within or without the State of Delaware, as may be
determined by the Board of Directors and specified in the notice of the meeting
or in a duly executed waiver of notice thereof.
2.2 ANNUAL MEETINGS. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held within one hundred twenty (120)
days after the close of the fiscal year of the Corporation on a day during such
period to be selected by the Board of Directors; provided, however, that the
failure to hold the annual meeting within the designated period of time or on
the designated date shall not work a forfeiture or dissolution of the
Corporation.
2.3 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, may be called by the Board of Directors, the Chairman of
the Board, the Chief Executive Officer, the President, or the Executive Vice
President, if one is elected. The notice of a special meeting shall state the
purpose or purposes of the proposed meeting and the business to be transacted at
any such special meeting of stockholders, and shall be limited to the purposes
stated in the notice thereof.
2.4 VOTING LIST. The officer or agent having charge and custody of the
stock transfer books of the Corporation shall prepare, at least ten (10) days
before each meeting of the stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order and showing the
address of each stockholder and the number of shares having voting privileges
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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business hours for a period of not less than ten (10) days prior to such meeting
either at the principal office of the Corporation or at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. Such list shall also be produced at the place of the meeting and kept
open during the meeting and shall be subject to the inspection of any
stockholder during the entire time of the meeting. The original stock ledger or
transfer book, or a duplicate thereof, shall be prima facie evidence as to
identity of the stockholders entitled to examine such list or stock ledger or
transfer book and to vote at any such meeting of the stockholders. The failure
to comply with the requirements of this Section shall not effect the validity of
any action taken at said meeting.
2.6 QUORUM. The holders of a majority of the shares of the capital stock
issued and outstanding and entitled to vote thereat, represented in person or by
proxy, shall be required and shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute, by the Certificate of Incorporation, or by these Bylaws. If, however,
such quorum shall not be present or represented at any such meeting of the
stockholders, the stockholders entitled to vote thereat, present in person, or
represented by proxy, shall have the power to adjourn the meeting, from time to
time, without notice other than an announcement at the meeting, until a quorum
shall be present or represented. At such reconvened meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is
for more than thirty (30) days or if after the adjournment a new record date is
fixed for the reconvened meeting, a notice of said meeting shall be given to
each stockholder entitled to vote at said meeting.
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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2.7 REQUISITE VOTE. If a quorum is present at any meeting, the vote of
the holders of a majority of the outstanding shares of capital stock having
voting power, present in person or represented by proxy, shall determine any
question brought before such meeting, unless the question is one upon which, by
express provision of the Certificate of Incorporation or of these Bylaws, a
different vote shall be required, in which case such express provision shall
govern and control the determination of such question.
2.8 WITHDRAWAL OF QUORUM. If a quorum is present at the time of
commencement of any meeting, the stockholders present at such duly convened
meeting may continue to transact any business which may properly come before
said meeting until adjournment thereof, notwithstanding the withdrawal from such
meeting of sufficient holders of the shares of capital stock entitled to vote
thereat which leaves less than a quorum remaining.
2.9 VOTING AT MEETING. Voting at meeting of stockholders shall be
conducted and exercised subject to the following procedures and regulations:
(a) VOTING POWER. In the exercise of voting power with respect to
each matter properly submitted to a vote at any meeting of stockholders,
each stockholder of the capital stock of the Corporation having voting
power shall be entitled to one (1) vote for each such share held in his
name on the books of the Corporation, except to the extent otherwise
specified by the Certificate of Incorporation or Certificate of
Designations pertaining to a series of preferred stock.
(b) EXERCISE OF VOTING POWER; PROXIES. Each stockholder entitled to
vote at a meeting or to express consent or dissent to corporate action in
writing without a meeting may vote either in person or authorize another
person or persons to act for him by proxy duly appointed by instrument in
writing subscribed by such stockholder or by his duly authorized attorney-
in-fact; provided, however, no such appointment of proxy shall be valid,
voted or acted upon after the expiration of three (3) years from the date
of such written instrument of appointment, unless a longer period is
stated therein. A proxy shall be revocable unless expressly designated
therein as irrevocable and coupled with an interest sufficient in law to
support an irrevocable power. Proxies coupled with an interest include,
but are not limited to, the appointment as proxy of: (a) a pledgee; (b)
a person who purchased or agreed to purchase or owns or holds an option
to purchase the shares voted; (c) a creditor of the Corporation who
extended its credit under terms requiring the appointment; (d) an
employee of the Corporation whose employment contract requires the
appointment; (e) a party to a voting agreement created under Section
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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218 of the General Corporation Law of Delaware, as amended. Each proxy
shall be filed with the Secretary of the Corporation prior to or at the
time of the meeting. Any vote may be taken by voice vote or by show of
hands unless someone entitled to vote at the meeting objects, in which case
written ballots shall be used.
(c) ELECTION OF DIRECTORS. In all elections of Directors cumulative
voting shall be prohibited.
2.10 RECORD DATE. As more specifically provided in Article 7, Section
7.7 hereof, the Board of Directors may fix in advance a record date for the
purpose of determining stockholders entitled to notice of or to vote at a
meeting of stockholders, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be less than ten (10) nor more than sixty (60) days
prior to such meeting. In the absence of any action by the Board of Directors
fixing the record date, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day before the day on which notice of the meeting is given, or,
if notice is waived, at the close of business on the day before the meeting is
held.
2.11 ACTION WITHOUT MEETINGS. Any action permitted or required to be
taken at a meeting of the stockholders of the Corporation may be taken without a
meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of the outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, and such
written consent shall have the same force and effect as the requisite vote of
the stockholders thereon. Any such executed written consent, or an executed
counterpart thereof, shall be placed in the minute book of the Corporation.
Every written consent shall bear the date of signature of each stockholder who
signs the consent. No written consent shall be effective to take the action
that is the subject
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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<PAGE>
of the consent unless, within sixty (60) days after the date of the earliest
dated consent delivered to the Corporation in the manner required under Section
2.11 hereof, a consent or consents signed by the holders of the minimum number
of shares of the capital stock issued and outstanding and entitled to vote on
and approve the action that is the subject of the consent are delivered to the
Corporation. Prompt notice of the taking of any action by stockholders without
a meeting by less than unanimous written consent shall be given to those
stockholders who did not consent in writing to the action.
2.12 RECORD DATE FOR ACTION WITHOUT MEETING. Unless a record date shall
have previously been fixed or determined by the Board of Directors as provided
in Section 2.10 hereof, whenever action by stockholders is proposed to be taken
by consent in writing without a meeting of stockholders, the Board of Directors
may fix a record date for the purpose of determining stockholders entitled to
consent to that action, which record date shall not precede, and shall not be
more than ten (10) days after, the date upon which the resolution fixing the
record date is adopted by the Board of Directors. If no record date has been
fixed by the Board of Directors and the prior action of the Board of Directors
is not required by statute or the Certificate of Incorporation, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office, its principal place of
business, or an officer or agent of the Corporation having custody of the books
in which proceedings of meetings of stockholders are recorded. Delivery shall
be by hand or by certified or registered mail, return receipt requested.
Delivery to the Corporation's principal place of business shall be addressed to
the President or principal executive officer of the Corporation. If no record
date shall have been fixed by the Board of Directors and prior action of the
Board of Directors is required by statute, the record
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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<PAGE>
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board of Directors adopts a resolution taking such prior action.
2.13 PREEMPTIVE RIGHTS. No holder of shares of capital stock of the
Corporation shall, as such holder, have any right to purchase or subscribe for
any capital stock of any class which the Corporation may issue or sell, whether
or not exchangeable for any capital stock of the Corporation of any class or
classes, whether issued out of unissued shares authorized by the Certificate of
Incorporation, as amended, or out of shares of capital stock of the Corporation
acquired by it after the issue thereof; nor shall any holder of shares of
capital stock of the Corporation, as such holder, have any right to purchase,
acquire or subscribe for any securities which the Corporation may issue or sell
whether or not convertible into or exchangeable for shares of capital stock of
the Corporation of any class or classes, and whether or not any such securities
have attached or appurtenant thereto warrants, options or other instruments
which entitle the holder thereof to purchase, acquire or subscribe for shares of
capital stock of any class or classes.
ARTICLE 3
DIRECTORS
---------
3.1 MANAGEMENT POWERS. The powers of the Corporation shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.
3.2 NUMBER AND QUALIFICATION. The Board of Directors shall consist of
not less than one (1) member nor more than fifteen (15) members; provided,
however, that the initial Board
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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<PAGE>
of Directors shall consist of three (3) members. Directors need not be
residents of the State of Delaware nor stockholders of the Corporation. Each
Director shall qualify as a Director following election as such by agreeing to
act or acting in such capacity. The number of Directors shall be fixed, and may
be increased or decreased, from time to time by resolution of the Board of
Directors without the necessity of a written amendment to the Bylaws of the
Corporation; provided, however, no decrease shall have the effect of shortening
the term of any incumbent Director.
3.3 CLASSIFICATION OF DIRECTORS. The Directors of the Corporation shall
be divided into three classes designated Class I, Class II, and Class III. The
initial members of the Board of Directors shall be as set forth in the
Certificate of Incorporation of the Corporation and the class of which such
members belong shall be Class III. Additional Directors resulting from newly
created directorships shall be elected in the manner set forth in Section 3.6
hereof.
3.4 ELECTION AND TERM. Initially, Class I Directors shall be elected for
a term extending until the first annual meeting of stockholders after the date
hereof, Class II Directors shall be elected for a term extending until the
second annual meeting of stockholders after the date hereof, and Class III
Directors shall be elected for a term extending until the third annual meeting
of stockholders after the date hereof. At each annual meeting of the
stockholders, the stockholders entitled to vote in an election for such class of
Directors whose term expires at that annual meeting shall elect successors for a
term of three years expiring at the third succeeding annual meeting of
stockholders. Each Director shall hold office for the term for which he is
elected, and until his successor shall be elected and qualified or until his
death, resignation, or removal, if earlier.
3.5 VOTING ON DIRECTORS. Directors shall be elected by the vote of the
holders of a plurality of the shares entitled to vote in the election of
Directors and represented in person
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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<PAGE>
or by proxy at a meeting of stockholders at which a quorum is present.
Cumulative voting in the election of Directors is expressly prohibited.
3.6 VACANCIES AND NEW DIRECTORSHIPS. Vacancies and newly created
directorships resulting from any increase in the authorized number of Directors
elected by all the stockholders having the right to vote as a single class may
be filled by the affirmative vote of a majority of the Directors then in office,
although less than a quorum, or by a sole remaining Director, or by the
requisite vote of the stockholders at an annual meeting of the stockholders or
at a special meeting of the stockholders called for that purpose, and the
Directors so elected shall hold office until their successors are elected and
qualified. If the holders of any class or classes of stock or series of stock
of the Corporation are entitled to elect one or more Directors by the
Certificate of Incorporation or Certificate of Designations applicable to such
class or series, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the Directors elected by such
class or classes or series thereof then in office, or by a sole remaining
Director so elected, and the Directors so elected shall hold office until the
next election of the class for which such Directors shall have been chosen, and
until their successors shall be elected and qualified. For purposes of these
Bylaws, a "vacancy" shall be defined as an unfilled directorship arising by
virtue of the death, resignation, or removal of a Director theretofore duly
elected to serve in such capacity in accordance with the relevant provisions of
these Bylaws.
3.7 REMOVAL. Any Director may be removed either for or without cause at
any duly convened special or annual meeting of stockholders, by the affirmative
vote of a majority in number of shares of the stockholders present in person or
by proxy at any meeting and entitled to vote for the election of such Director,
provided notice of intention to act upon such matter shall have been given in
the notice calling such meeting.
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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<PAGE>
3.8 MEETINGS. The meetings of the Board of Directors shall be held and
conducted subject to the following regulations:
(a) PLACE. Meetings of the Board of Directors of the Corporation,
annual, regular or special, are to be held at the principal office or place
of business of the Corporation, or such other place, either within or
without the State of Delaware, as may be specified in the respective
notice, or waivers of notice, thereof.
(b) ANNUAL MEETING. The Board of Directors shall meet each year
immediately after the annual meeting of the stockholders, at the place
where such meeting of the stockholders has been held (either within or
without the State of Delaware), for the purpose of electing officers and
the consideration of any other business that may properly be brought before
the meeting. No notice of any kind to either old or new members of the
Board of Directors for such annual meeting shall be required.
(c) REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and at such place or places as
shall from time to time be determined and designated by the Board of
Directors.
(d) SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the Chief Executive Officer, or
the President of the Corporation on notice of two (2) days to each Director
either personally or by mail or by telegram, telex, or facsimile
transmission and delivery. Special meetings of the Board of Directors
shall be called by the Chairman of the Board or the President or Secretary
in like manner and on like notice on the written request of three (3)
Directors.
(e) NOTICE AND WAIVER OF NOTICE. Attendance of a Director at any
meeting shall constitute a waiver of notice of such meeting, except where a
Director attends for the express purpose of objecting to the transaction of
any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any regular
meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
(f) QUORUM. At all meetings of the Board of Directors, a majority
of the number of Directors shall constitute a quorum for the transaction of
business, unless a greater number is required by law or by the Certificate
of Incorporation. If a quorum shall not be present at any meeting of
Directors, the Directors present thereat may adjourn the meeting, from time
to time, without notice other than announcement at the meeting, until a
quorum shall be present.
(g) REQUISITE VOTE. The act of a majority of the Directors present
at any meeting at which a quorum is present shall be the act of the Board
of Directors unless the act of a greater number is required by statute, by
the Certificate of Incorporation, or by these Bylaws.
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<PAGE>
3.9 ACTION WITHOUT MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
by law to be taken at any meeting of the Board of Directors, or any committee
thereof, may be taken without a meeting, if prior to such action a written
consent thereto is signed by all members of the Board of Directors or of such
committee, as the case may be, and such written consent is filed in the minutes
or proceedings of the Board of Directors or committee.
3.10 COMMITTEES. Committees designated and appointed by the Board of
Directors shall function subject to and in accordance with the following
regulations and procedures:
(a) DESIGNATION AND APPOINTMENT. The Board of Directors may, by
resolution adopted by a majority of the entire Board of Directors,
designate and appoint one or more committees under such name or names and
for such purpose or function as may be deemed appropriate.
(b) MEMBERS; ALTERNATE MEMBERS; TERMS. Each committee thus
designated and appointed shall consist of two or more of the Directors of
the Corporation, one of whom, in the case of the Executive Committee, shall
be the Chief Executive Officer of the Corporation. The Board of Directors
may designate one or more of its members as alternate members of any
committee, who may, subject to any limitations imposed by the entire Board
of Directors, replace absent or disqualified members at any meeting of that
committee. The members or alternate members of any such committee shall
serve at the pleasure of and subject to the discretion of the Board of
Directors.
(c) AUTHORITY. Each committee, to the extent provided in the
resolution of the Board of Directors creating same, shall have and may
exercise such of the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation as the Board of
Directors may direct and delegate, except, however, those matters which are
required by statute to be reserved unto or acted upon by the entire Board
of Directors.
(d) RECORDS. Each such committee shall keep and maintain regular
records or minutes of its meetings and report the same to the Board of
Directors when required.
(e) CHANGE IN NUMBER. The number of members or alternate members of
any committee appointed by the Board of Directors, as herein provided, may
be increased or decreased (but not below two) from time to time by
appropriate resolution adopted by a majority of the entire Board of
Directors.
(f) VACANCIES. Vacancies in the membership of any committee
designated and appointed hereunder shall be filled by the Board of
Directors, at a regular or special
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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meeting of the Board of Directors, in a manner consistent with the
provisions of this Section 3.10.
(g) REMOVAL. Any member or alternate member of any committee
appointed hereunder may be removed by the Board of Directors by the
affirmative vote of a majority of the entire Board of Directors, whenever
in its judgment the best interest of the Corporation will be served
thereby.
(h) MEETINGS. The time, place, and notice (if any) of committee
meetings shall be determined by the members of such committee.
(i) QUORUM: REQUISITE VOTE. At meetings of any committee appointed
hereunder, a majority of the number of members designated by the Board of
Directors shall constitute a quorum for the transaction of business. The
act of a majority of the members and alternate members of the committee
present at any meeting at which a quorum is present shall be the act of
such committee, except as otherwise specifically provided by statute or by
the Certificate of Incorporation or by these Bylaws. If a quorum is not
present at a meeting of such committee, the members of such committee
present may adjourn the meeting from time to time, without notice other
than an announcement at the meeting, until a quorum is present.
(j) COMPENSATION. Appropriate compensation for members and
alternate members of any committee appointed pursuant to the authority
hereof may be authorized by the action of a majority of the entire Board of
Directors pursuant to the provisions of Section 3.11 hereof.
(k) ACTION WITHOUT MEETINGS. Any action required or permitted to be
taken at a meeting of any committee may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all
members of such committee. Such consent shall have the same force and
effect as a unanimous vote at a meeting. The signed consent, or a signed
copy, shall become a part of the record of such committee.
(l) RESPONSIBILITY. Notwithstanding any provision to the contrary
herein, the designation and appointment of a committee and the delegation
of authority to it shall not operate to relieve the Board of Directors, or
any member thereof, of any responsibility imposed upon it or him by law.
3.11 COMPENSATION. By appropriate resolution of the Board of Directors,
the Directors may be reimbursed their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum (as determined
from time to time by the vote of a majority of the Directors then in office) for
attendance at each meeting of the Board of Directors or a stated salary as
Director, or both. No such payment shall preclude any Director from
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serving the Corporation in another capacity and receiving compensation therefor.
Members of special or standing committees may, by appropriate resolution of the
Board of Directors, be allowed similar reimbursement of expenses and
compensation for attending committee meetings.
3.12 MAINTENANCE OF RECORDS. The Board of Directors may keep the books
and records of the Corporation, except such as are required by law to be kept
within the State, outside the State of Delaware or at such place or places as
they may, from time to time, determine.
3.13 INTERESTED DIRECTORS AND OFFICERS. No contract or other transaction
between the Corporation and one or more of its Directors or officers, or between
the Corporation and any firm of which one or more of its Directors or officers
are members or employees, or in which they are interested, or between the
Corporation and any corporation or association of which one or more of its
Directors or officers are stockholders, members, directors, officers, or
employees, or in which they are interested, shall be void or voidable solely for
this reason, or solely because of the presence of such Director or Directors, or
officer or officers, at the meeting of the Board of Directors of the
Corporation, which acts upon, or in reference to, such contract, or transaction,
if (a) the material facts of such relationship or interest shall be disclosed or
known to the Board of Directors and the Board of Directors shall, nevertheless
in good faith, authorize, approve, and ratify such contract or transaction by a
vote of a majority of the Board of Directors present, such interested Director
or Directors to be counted in determining whether a quorum is present, but not
to be counted in calculating the majority of such quorum necessary to carry such
vote; (b) the material facts of such relationship or interest as to the contract
or transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by the vote of the stockholders; or (c) the contract or transaction is fair to
the Corporation as of the time it is authorized, approved, or ratified by the
Board of Directors, a committee thereof or the stockholders. The provision of
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this Section shall not be construed to invalidate any contract or other
transaction which would otherwise be valid under the common and statutory law
applicable thereto.
ARTICLE 4
NOTICES
--------
4.1 METHOD OF NOTICE. Whenever under the provisions of the General
Corporation Law of Delaware or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any Director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing and delivered personally, through the United States mail, by a
recognized delivery service (such as Federal Express), or by means of telegram,
telex or facsimile transmission, addressed to such Director or stockholder, at
his address or telex or facsimile transmission number, as the case may be, as it
appears on the records of the Corporation, with postage and fees thereon
prepaid. Such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail or with an express delivery service
or when transmitted by telex or facsimile transmission or personally delivered,
as the case may be.
4.2 WAIVER. Whenever any notice that is required to be given under the
provisions of the General Corporation Law of Delaware or under the provisions of
the Certificate of Incorporation or these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice. Attendance by such person or persons, whether in person or by proxy, at
any meeting requiring notice shall constitute a waiver of notice of such
meeting, except where such person attends the meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully
called or convened.
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ARTICLE 5
OFFICERS AND AGENTS
-------------------
5.1 DESIGNATION. The officers of the Corporation shall be chosen by the
Board of Directors and shall consist of the offices of:
(a) Chairman of the Board, Chief Executive Officer, Chief Operating
Officer, President, Vice President, Treasurer, and Secretary; and
(b) Such other offices and officers (including one or more
additional Vice Presidents) and assistant officers and agents as the Board
of Directors shall deem necessary.
5.2 ELECTION OF OFFICERS. Each officer designated in Section 5.1(a)
hereof shall be elected by the Board of Directors on the expiration of the term
of office of such officer, as herein provided, or whenever a vacancy exists in
such office. Each officer or agent designated in Section 5.1(b) above may be
elected by the Board of Directors at any meeting.
5.3 QUALIFICATIONS. No officer or agent need be a stockholder of the
Corporation or a resident of Delaware. No officer or agent is required to be a
Director, except the Chairman of the Board. Any two or more offices may be held
by the same person.
5.4 TERM OF OFFICE. Unless otherwise specified by the Board of Directors
at the time of election or appointment, or by the express provisions of an
employment contract approved by the Board, the term of office of each officer
and each agent shall expire on the date of the first meeting of the Board of
Directors next following the annual meeting of stockholders each year. Each
such officer or agent, unless elected or appointed to an additional term, shall
serve until the expiration of the term of his office or, if earlier, his death,
resignation or removal.
5.5 AUTHORITY. Officers and agents shall have such authority and perform
such duties in the management of the Corporation as are provided in these Bylaws
or as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.
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5.6 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed with or without cause by the Board of Directors
whenever in its judgment the best interests of the Corporation will be served
thereby. Such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election or appointment of an officer or agent
shall not of itself create contract rights.
5.7 VACANCIES. Any vacancy occurring in any office of the Corporation
(by death, resignation, removal, or otherwise) shall be filled by the Board of
Directors.
5.8 COMPENSATION. The compensation of all officers and agents of the
Corporation shall be fixed from time to time by the Board of Directors.
5.9 CHAIRMAN OF THE BOARD. The Chairman of the Board shall be chosen
from among the Directors. The Chairman of the Board shall have the power to
call special meetings of the stockholders and of the Board of Directors for any
purpose or purposes, and he shall preside at all meetings of the Board of
Directors, unless he shall be absent or unless he shall, at his election,
designate the Vice Chairman, if one is elected, to preside in his stead. The
Chairman of the Board shall advise and counsel the Chief Executive Officer and
other officers of the Corporation and shall exercise such powers and perform
such duties as shall be assigned to or required by him from time to time by the
Board of Directors.
5.10 VICE CHAIRMAN. The Vice Chairman, if one is elected, shall have the
power to call special meetings of the stockholders and of the Directors for any
purpose or purposes, and, in the absence of the Chairman of the Board, the Vice
Chairman shall preside at all meetings of the Board of Directors unless he shall
be absent. The Vice Chairman shall advise and counsel the other officers of the
Corporation and shall exercise such powers and perform such duties as shall be
assigned to or required of him from time to time by the Board of Directors.
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5.11 CHIEF EXECUTIVE OFFICER. Subject to the supervision of the Board of
Directors, the Chief Executive Officer shall have general supervision,
management, direction, and control of the business and affairs of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The Chief Executive Officer shall execute
bonds, mortgages, and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise executed
and except where the execution thereof shall be expressly delegated by the Board
of Directors to some other officer or agent of the Corporation. The Chief
Executive Officer shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board and the Vice Chairman, at all meetings of
the Board of Directors. The Chief Executive Officer shall be ex officio a
member of the Executive Committee, if any of the Board of Directors. The Chief
Executive Officer shall have the general powers and duties of management usually
vested in the office of chief executive officer of a corporation and shall
perform such other duties and possess such other authority and powers as the
Board of Directors may from time to time prescribe. In the event no individual
is elected to the office of Chief Operating Officer, the Chief Executive Officer
shall have the powers and perform the duties of the Chief Operating Officer.
5.12 CHIEF OPERATING OFFICER. Subject to the supervision of the Board of
Directors, the Chief Operating Officer, if one is elected, shall have general
supervision of the day-to-day operations of the Corporation. The Chief
Operating Officer shall be ex officio a member of the Executive Committee, if
any, of the Board of Directors. The Chief Operating Officer shall have the
general power and duties of management usually vested in the office of chief
operating officer of a corporation and shall perform such other duties and
possess such other authority and powers as the Board of Directors may from time
to time prescribe.
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5.13 PRESIDENT. In the absence or disability of the Chief Executive
Officer, the President shall perform all of the duties of the Chief Executive
Officer and when so acting shall have all the powers and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign all
instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the Bylaws. The President
shall have the general powers and duties usually vested in the office of
president of a corporation and shall perform such other duties and possess such
other authority and powers as the Board of Directors may from time to time
prescribe or as the Chief Executive Officer may from time to time delegate.
5.14 VICE PRESIDENTS. The Vice President, or if there shall be more than
one, the Vice Presidents shall perform such duties and have such powers as the
Board of Directors may from time to time prescribe or as the Chief Executive
Officer may from time to time delegate. The Board of Directors may from time to
time appoint certain Vice Presidents who may have special designations,
including "Executive Vice President," "Senior Vice President," and "Vice
President - Land." Vice Presidents having such special designation shall have
such powers and perform such duties and services as shall from time to time be
prescribed, assigned, or delegated to them by the Board of Directors, the Chief
Executive Officer, or the President. The Executive Vice President or other Vice
President designated by the Board of Directors, shall, in the absence or
disability of the President, have the authority and perform the duties of said
office (including the duties and authority of the President as either Chief
Executive Officer or Chief Operating Officer, or both, if the President serves
as such).
5.15 SECRETARY. The Secretary shall attend all meetings of the Board of
Directors and all meeting of the stockholders of the Corporation and record all
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be maintained for that purpose and
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shall perform like duties for the standing committees when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors, the Chairman
of the Board, the Chief Executive Officer, or the President. The Secretary
shall have custody of the corporate seal of the Corporation, if any, and he, or
an Assistant Secretary, shall have authority to affix the same, if any, to any
instrument requiring it, and when so affixed, it may be attested by his
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation, if any, and to attest the affixing by his signature.
5.16 ASSISTANT SECRETARIES. The Assistant Secretary, of if there be more
than one, the Assistant Secretaries in the order determined by the Board of
Directors, shall in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the Chief Executive Officer or the President may from time
to time delegate.
5.17 TREASURER. The Treasurer shall be the chief financial officer of
the Corporation and shall have the custody of the corporate funds and securities
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. The Treasurer shall disburse the
funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Chief Executive
Officer (and Chairman of the Board, if one is elected) and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial
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condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money, and other property of whatever
kind in his possession or under his control owned by the Corporation. The
Treasurer shall perform such other duties and have such other authority and
powers as the Board of Directors may from time to time prescribe or as the Chief
Executive Officer or President may from time to time delegate.
5.18 ASSISTANT TREASURERS. The Assistant Treasurer, or, if there shall
be more than one, the Assistant Treasurers in the order determined by the Board
of Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the Chief Executive Officer or President may from time to
time delegate.
ARTICLE 6
INDEMNIFICATION
---------------
6.1 MANDATORY INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party or who was or is a witness without being named
a party, to any threatened, pending or completed action, claim, suit or
proceeding, whether civil, criminal, administrative or investigative, any appeal
in such an action, suit or proceeding, whether civil, criminal, administrative
or investigative, any appeal in such an action, suit or proceeding, and any
inquiry or investigation that could lead to such an action, suit or proceeding
(a "Proceeding"), by reason of the fact that such individual is or was a
Director or officer of the Corporation, or while a Director or officer of the
Corporation is or was serving at the request
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of the Corporation as a director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another corporation,
partnership, trust, employee benefit plan or other enterprise, shall be
indemnified and held harmless by the Corporation from and against any judgments,
penalties (including excise taxes), fines, amounts paid in settlement and
reasonable expenses (including court costs and attorneys' fees) actually
incurred by such person in connection with such Proceeding if it is determined
that he acted in good faith and reasonably believed (i) in the case of conduct
in his official capacity on behalf of the Corporation that his conduct was in
the Corporation's best interests, (ii) in all other cases, that his conduct was
not opposed to the best interests of the Corporation, and (iii) with respect to
any Proceeding which is a criminal action, that he had no reasonable cause to
believe his conduct was unlawful; provided, however, that in the event a
determination is made that such person is liable to the Corporation or is found
liable on the basis that personal benefit was improperly received by such
person, the indemnification is limited to reasonable expenses actually incurred
by such person in connection with the Proceeding and shall not be made in
respect of any Proceeding in which such person shall have been found liable for
willful or intentional misconduct in the performance of his duty to the
Corporation. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself be determinative of whether the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any Proceeding which is a
criminal action, had reasonable cause to believe that his conduct was unlawful.
A person shall be deemed to have been found liable in respect of any claim,
issue or matter only after the person shall have been so adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom.
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6.2 DETERMINATION OF INDEMNIFICATION. Any indemnification under the
foregoing Section 6.1 (unless ordered by a court of competent jurisdiction)
shall be made by the Corporation only upon a determination that indemnification
of such person is proper in the circumstances by virtue of the fact that it
shall have been determined that such person has met the applicable standard of
conduct. Such determination shall be made (1) by a majority vote of a quorum
consisting of Directors who at the time of the vote are not named defendants or
respondents in the Proceeding; (2) if such quorum cannot be obtained, by a
majority vote of a committee of the Board of Directors, designated to act in the
matter by a majority of all Directors, consisting of two or more Directors who
at the time of the vote are not named defendants or respondents in the
Proceeding; (3) by special legal counsel (in a written opinion) selected by the
Board of Directors or a committee of the Board by a vote as set forth in
Subsection (1) or (2) of this Section, or, if such quorum cannot be established,
by a majority vote of all Directors (in which Directors who are named defendants
or respondents in the Proceeding may participate); or (4) by the stockholders of
the Corporation in a vote that excludes the shares held by Directors who are
named defendants or respondents in the Proceeding.
6.3 ADVANCE OF EXPENSES. Reasonable expenses, including court costs and
attorney's fees, incurred by a person who was or is a witness or who was or is
named as a defendant or respondent in a Proceeding, by reason of the fact that
such individual is or was a Director or officer of the Corporation, or while a
Director or officer of the Corporation is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, partnership,
trust, employee benefit plan or other enterprise, shall be paid by the
Corporation at reasonable intervals in advance of the final disposition of such
Proceeding, and without the determination set forth in
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Section 6.2, upon receipt of the Corporation of a written affirmation by such
person of his good faith belief that he has met the standard of conduct
necessary for indemnification under this Article 6, and a written undertaking by
or on behalf of such person to repay the amount paid or reimbursed by the
Corporation if it is ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article 6. Such written
undertaking shall be an unlimited obligation of such person and it may be
accepted without reference to financial ability to make repayment.
6.4 PERMISSIVE INDEMNIFICATION. The Board of Directors of the
Corporation may authorize the Corporation to indemnify employees or agents of
the Corporation, and to advance the reasonable expenses of such persons, to the
same extent, following the same determinations and upon the same conditions as
are required for the indemnification of and advancement of expenses to Directors
and officers of the Corporation.
6.5 NATURE OF INDEMNIFICATION. The indemnification and advancement of
expenses provided hereunder shall not be deemed exclusive or any other rights to
which those seeking indemnification may be entitled under the Certificate of
Incorporation, these Bylaws, any agreement, vote of stockholders or
disinterested Directors or otherwise, both as to actions taken in an official
capacity and as to actions taken in any other capacity while holding such
office, shall continue as to a person who has ceased to be a Director, officer,
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person.
6.6 INSURANCE. The Corporation shall have the power and authority to
purchase and maintain insurance or another arrangement on behalf of any person
who is or was a Director, officer, employee or agent of the Corporation, or who
is or was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent, or
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similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise, against any liability, claim, damage, loss or risk asserted against
such person and incurred by such person in any such capacity or arising out of
the status of such person as such, irrespective of whether the Corporation would
have the power to indemnify and hold such person harmless against such liability
under the provisions hereof. If the insurance or other arrangement is with a
person or entity that is not regularly engaged in the business of providing
insurance coverage, the insurance or arrangement may provide for payment of a
liability with respect to which the Corporation would not have the power to
indemnify the person only if including coverage for the additional liability has
been approved by the stockholders of the Corporation. Without limiting the
power of the Corporation to procure or maintain any kind of insurance or other
arrangement, the Corporation may, for the benefit of persons indemnified by the
Corporation, (1) create a trust fund; (2) establish any form of self-insurance;
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation; or (4) establish a letter of credit,
guaranty, or surety arrangement. The insurance or other arrangement may be
procured, maintained, or established with the Corporation or with any insurer or
other person deemed appropriate by the Board of Directors regardless of whether
all or part of the stock or other securities of the insurer or other person are
owned in whole or part by the Corporation. In the absence of fraud, the
judgment of the Board of Directors as to the terms and conditions of the
insurance or other arrangement and the identity of the insurer or other person
participating in the arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the Directors approving
the insurance or arrangement to liability, on any ground, regardless of whether
the Directors participating in the approval is a beneficiary of the insurance or
arrangement.
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6.7 NOTICE. Any indemnification or advance of expenses to a present or
former Director or officer of the Corporation in accordance with this Article 6
shall be reported in writing to the stockholders of the Corporation with or
before the notice or waiver of notice of the next stockholders' meeting or with
or before the next submission of a consent to action without a meeting and, in
any case, within the next twelve month period immediately following the
indemnification or advance.
ARTICLE 7
STOCK CERTIFICATES AND TRANSFER REGULATIONS
-------------------------------------------
7.1 DESCRIPTION OF CERTIFICATES. The shares of the capital stock of the
Corporation shall be represented by certificates in the form approved by the
Board of Directors and signed in the name of the Corporation by the Chairman of
the Board, the Chief Executive Officer, the Chief Operating Officer, the
President or Vice President and the Secretary or an Assistance Secretary of the
Corporation, and, if any, sealed with the seal of the Corporation or a facsimile
thereof. Each certificate shall state on the face thereof the name of the
holder, the number and class of shares, the par value of shares covered thereby
or a statement that such shares are without par value, and such other matters as
are required by law. At such time as the Corporation may be authorized to issue
shares of more than one class, every certificate shall set forth upon the face
or back of such certificate a statement of the designations, preferences,
limitations and relative rights of the shares of each class authorized to be
issued, as required by the laws of the State of Delaware, or may state that the
Corporation will furnish a copy of such statement without charge to the holder
of such certificate upon receipt of a written request therefor from such holder.
7.2 ENTITLEMENT TO CERTIFICATES. Every holder of the capital stock in
the Corporation shall be entitled to have a certificate signed in the name of
the Corporation by the Chairman of
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the Board, the Chief Executive Officer, the Chief Operating Officer, the
President or a Vice President and the Secretary or an Assistant Secretary of the
Corporation, certifying the class of capital stock and the number of shares
represented thereby as owned or held by such stockholder in the Corporation.
7.3 SIGNATURES. The signatures of the Chairman of the Board, the Chief
Executive Officer, the Chief Operating Officer, the President, the Vice
President, the Secretary or the Assistant Secretary upon a certificate may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been placed upon any such certificate or
certificates, shall cease to serve as such officer or officers of the
Corporation, whether because of death, resignation, removal or otherwise, before
such certificate or certificates are issued and delivered by the Corporation,
such certificate or certificates may nevertheless be adopted by the Corporation
and be issued and delivered with the same effect as though the person or persons
who signed such certificates or whose facsimile signature or signatures have
been used thereon had not ceased to serve as such officer or officers of the
Corporation.
7.4 ISSUANCE OF CERTIFICATES. Certificates evidencing shares of its
capital stock (both treasury and authorized but unissued) may be issued for such
consideration (not less than par value, except for treasury shares which may be
issued for such consideration) and to such persons as the Board of Directors may
determine from time to time. Shares shall not be issued until the full amount
of the consideration, fixed as provided by law, has been paid.
7.5 PAYMENT FOR SHARES. Consideration for the issuance of shares shall
be paid, valued and allocated as follows:
(a) CONSIDERATION. The consideration for the issuance of shares
shall consist of money paid, labor done (including services actually
performed for the Corporation), or
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property (tangible or intangible) actually received. Neither promissory
notes nor the promise of future services shall constitute payment of
consideration for shares.
(b) VALUATION. In the absence of fraud in the transaction, the
determination of the Board of Directors as to the value of consideration
received shall be conclusive.
(c) EFFECT. When consideration, fixed as provided by law, has been
paid, the shares shall be deemed to have been issued and shall be
considered fully paid and nonassessable.
(d) ALLOCATION OF CONSIDERATION. The consideration received for
shares shall be allocated by the Board of Directors, in accordance with
law, between the stated capital and capital surplus accounts.
7.6 SUBSCRIPTIONS. Unless otherwise provided in the subscription
agreement, subscriptions of shares, whether made before or after organization of
the Corporation, shall be paid in full in such installments and at such times as
shall be determined by the Board of Directors. Any call made by the Board of
Directors for payment on subscriptions shall be uniform as to all shares of the
same class and series. In case of default in the payment of any installment or
call when payment is due, the Corporation may proceed to collect the amount due
in the same manner as any debt due to the Corporation.
7.7 RECORD DATE. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders, or any adjournment thereof,
or entitled to receive a distribution by the Corporation (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or a share dividend, or in order to make a determination of
stockholders for any other proper purpose, the Board of Directors may fix a
record date for any such determination of stockholders, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than sixty
(60) days, and in the case of a meeting of stockholders, not less than ten (10)
days prior to the date on which the particular action requiring
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such determination of stockholders is to be taken. If no record date is fixed
for the determination of stockholders entitled to notice of or to vote at a
meeting of stockholders, or stockholders entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, the date before the date on which
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such distribution or share dividend is adopted, as the
case may be, shall be the record date for such determination of stockholders.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this Section, such determination shall
be applied to any adjournment thereof.
7.8 REGISTERED OWNERS. Prior to due presentment for registration of
transfer of a certificate evidencing shares of the capital stock of the
Corporation in the manner set forth in Section 7.10 hereof, the Corporation
shall be entitled to recognize the person registered as the owner of such shares
on its books (or the books of its duly appointed transfer agent, as the case may
be) as the person exclusively entitled to vote, to receive notices and dividends
with respect to, and otherwise exercise all rights and powers relative to such
shares; and the Corporation shall not be bound or otherwise obligated to
recognize any claim, direct or indirect, legal or equitable, to such shares by
any other person, whether or not it shall have actual, express or other notice
thereof, except as otherwise provided by the laws of Delaware.
7.9 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation shall issue
a new certificate in place of any certificate for shares previously issued if
the registered owner of the certificate satisfies the following conditions:
(a) PROOF OF LOSS. Submits proof in affidavit form satisfactory to
the Corporation that such certificate has been lost, destroyed or
wrongfully taken;
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(b) TIMELY REQUEST. Requests the issuance of a new certificate
before the Corporation has notice that the certificate has been acquired by
a purchaser for value in good faith and without notice of an adverse claim;
(c) BOND. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any)
against any claim that may be made or otherwise asserted by virtue of the
alleged loss, destruction or theft of such certificate or certificates; and
(d) OTHER REQUIREMENTS. Satisfies any other reasonable requirements
imposed by the Corporation.
In the event a certificate has been lost, apparently destroyed or
wrongfully taken, and the registered owner of record fails to notify the
Corporation within a reasonable time after he has notice of such loss,
destruction, or wrongful taking, and the Corporation registers a transfer (in
the manner hereinbelow set forth) of the shares represented by the certificate
before receiving such notification, such prior registered owner of record shall
be precluded from making any claim against the Corporation for the transfer
required hereunder or for a new certificate.
7.10 REGISTRATION OF TRANSFERS. Subject to the provisions hereof, the
Corporation shall register the transfer of a certificate evidencing shares of
its capital stock presented to it for transfer if:
(a) ENDORSEMENT. Upon surrender of the certificate to the
Corporation (or its transfer agent, as the case may be) for transfer, the
certificate (or an appended stock power) is properly endorsed by the
registered owner, or by his duly authorized legal representative or
attorney-in-fact, with proper written evidence of the authority and
appointment of such representative, if any, accompanying the certificate;
(b) GUARANTY AND EFFECTIVENESS OF SIGNATURE. The signature of such
registered owner of his legal representative or attorney-in-fact, as the
case may be, has been guaranteed by a national banking association or
member of the New York Stock Exchange, and reasonable assurance in a form
satisfactory to the Corporation is given that such endorsements are genuine
and effective;
(c) ADVERSE CLAIMS. The Corporation has no notice of an adverse
claim or has otherwise discharged any duty to inquire into such a claim;
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(d) COLLECTION OF TAXES. Any applicable law (local, state or
federal) relating to the collection of taxes relative to the transaction
has been complied with; and
(e) ADDITIONAL REQUIREMENTS SATISFIED. Such additional conditions
and documentation as the Corporation (or its transfer agent, as the case
may be) shall reasonably require, including without limitation thereto, the
delivery with the surrender of such stock certificate or certificates of
proper evidence of succession, assignment or other authority to obtain
transfer thereof, as the circumstances may require, and such legal opinions
with reference to the requested transfer as shall be required by the
Corporation (or its transfer agent) pursuant to the provisions of these
Bylaws and applicable law, shall have been satisfied.
7.11 RESTRICTIONS ON TRANSFER AND LEGENDS ON CERTIFICATES.
(a) SHARES IN CLASSES OR SERIES. If the Corporation is authorized
to issue shares of more than one class, the certificate shall set forth,
either on the face or back of the certificate, a full or summary statement
of all of the designations, preferences, limitation, and relative rights of
the shares of each such class and, if the Corporation is authorized to
issue any preferred or special class in series, the variations in the
relative rights and preferences of the shares of each such series so far as
the same have been fixed and determined, and the authority of the Board of
Directors to fix and determine the relative rights and preferences of
subsequent series. In lieu of providing such a statement in full on the
certificate, a statement on the face or back of the certificate may provide
that the Corporation will furnish such information to any stockholder
without charge upon written request to the Corporation at its principal
place of business or registered office and that copies of the information
are on file in the office of the Secretary of State.
(b) RESTRICTION ON TRANSFER. Any restrictions imposed by the
Corporation on the sale or other disposition of its shares and on the
transfer thereof must be copies at length or in summary form on the face,
or so copied on the back and referred to on the face, of each certificate
representing shares to which the restriction applies. The certificate may
however state on the face or back that such a restriction exists pursuant
to a specified document and that the Corporation will furnish a copy of the
document to the holder of the certificate without charge upon written
request to the Corporation at its principal place of business.
(c) UNREGISTERED SECURITIES. Any security of the Corporation,
including, among others, any certificate evidencing shares of the capital
stock of the Corporation or warrants to purchase shares of capital stock of
the Corporation, which is issued to any person without registration under
the Securities Act of 1933, as amended, or the Blue Sky laws of any state,
shall not be transferable until the Corporation has been furnished with a
legal opinion of counsel with reference thereto, satisfactory in form and
content to the Corporation and its counsel, to the effect that such sale,
transfer or pledge does not involve a violation of the Securities Act of
1933, as amended, or the Blue Sky laws of any state having jurisdiction.
The certificate representing such security shall bear substantially the
following legend:
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS BUT HAVE BEEN ACQUIRED FOR THE
PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED,
SOLD OR TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT
UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) THE
CORPORATION SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE
TO THE CORPORATION AND ITS COUNSEL THAT REGISTRATION UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
ARTICLE 8
GENERAL PROVISIONS
------------------
8.1 DIVIDENDS. Subject to the provisions of the General Corporation Law
of Delaware, as amended, and the Certificate of Incorporation, dividends of the
Corporation shall be declared and paid pursuant to the following regulations:
(a) DECLARATION AND PAYMENT. Dividends on the issued and
outstanding shares of capital stock of the Corporation may be declared by
the Board of Directors at any regular or special meeting and may be paid in
cash, in property, or in shares of capital stock. Such declaration and
payment shall be at the discretion of the Board of Directors.
(b) RECORD DATE. The Board of Directors may fix in advance a record
date for the purpose of determining stockholders entitled to receive
payment of any dividend, such record date to be not more than sixty (60)
days prior to the payment date of such dividend, or the Board of Directors
may close the stock transfer books for such purpose for a period of not
more than sixty (60) days prior to the payment date of such dividend. In
the absence of action by the Board of Directors, the date upon which the
Board of Directors adopts the resolution declaring such dividend shall be
the record date.
8.2 RESERVES. There may be created by resolution of the Board of
Directors out of the surplus of the Corporation such reserve or reserves as the
Board of Directors from time to time, in its discretion, thinks proper to
provide for contingencies, or to repair or maintain any property of the
Corporation, or for such other purposes as the Board of Directors shall think
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beneficial to the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
8.3 BOOKS AND RECORDS. The Corporation shall maintain correct and
complete books and records of account and shall prepare and maintain minutes of
the proceedings of its stockholders, its Board of Directors, and each committee
of its Board of Directors. The Corporation shall keep at its registered office
or principal place of business, or at the office of its transfer agent or
registrar, a record of original issuance of shares issued by the Corporation and
a record of each transfer of those shares that have been presented to the
Corporation for registration or transfer. Such records shall contain the names
and addresses of all past and present stockholders and the number and class of
the shares issued by the Corporation held by each.
8.4 ANNUAL STATEMENT. The Board of Directors shall present at or before
each annual meeting of stockholders a full and clear statement of the business
and financial condition of the Corporation, including a reasonably detailed
balance sheet and income statement under current date.
8.5 CONTRACTS AND NEGOTIABLE INSTRUMENTS. Except as otherwise provided
by law or these Bylaws, any contract or other instrument relative to the
business of the Corporation may be executed and delivered in the name of the
Corporation and on its behalf by the Chairman of the Board, the Chief Executive
Officer, the Chief Operating Officer, or the President of the Corporation. The
Board of Directors may authorize any other officer or agent of the Corporation
to enter into any contract or execute and deliver any contract in the name and
on behalf of the Corporation, and such authority may be general or confined to
specific instances as the Board of Directors may determine by resolution. All
bills, notes, checks, or other instruments for the payment of money shall be
signed or countersigned by such officer, officers,
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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agent, or agents and in such manner as are permitted by these Bylaws and/or as,
from time to time, may be prescribed by resolution of the Board of Directors.
Unless authorized to do so by these Bylaws or by the Board of Directors, no
officer, agent, or employee shall have any power or authority to bind the
Corporation by any contract or engagement, or to pledge its credit, or to render
it liable pecuniarily for any purpose or to any amount.
8.6 FISCAL YEAR. The fiscal year of the Corporation shall be the
calendar year.
8.7 CORPORATE SEAL. The Corporation seal, if any, shall be in such form
as may be determined by the Board of Directors. The seal, if any, may be used
by causing it or a facsimile thereof to be impressed or affixed or in any manner
reproduced.
8.8 RESIGNATIONS. Any Director, officer, or agent may resign his office
or position with the Corporation by delivering written notice thereof to the
Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer,
the President, or the Secretary. Such resignation shall be effective at the
time specified therein, or immediately upon delivery if no time is specified.
Unless otherwise specified therein, an acceptance of such resignation shall not
be a necessary prerequisite of its effectiveness.
8.9 AMENDMENT OF BYLAWS. These Bylaws may be altered, amended, or
repealed and new Bylaws adopted at any meeting of the Board of Directors or
stockholders at which a quorum is present, by the affirmative vote of a majority
of the Directors or stockholders, as the case may be, present at such meeting,
provided notice of the proposed alteration, amendment, or repeal be contained in
the notice of such meeting.
8.10 CONSTRUCTION. Whenever the context so requires herein, the
masculine shall include the feminine and neuter, and the singular shall include
the plural, and conversely. If any portion or provision of these Bylaws shall
be held invalid or inoperative, then, so far as is reasonable and possible: (1)
the remainder of these Bylaws shall be considered valid and
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operative, and (2) effect shall be given to the intent manifested by the portion
or provision held invalid or inoperative.
8.11 TELEPHONE MEETINGS. Stockholders, Directors, or members of any
committee may hold any meeting of such stockholders, Directors, or committee by
means of conference telephone or similar communications equipment which permits
all persons participating in the meeting to hear each other and actions taken at
such meeting shall have the same force and effect as if taken at a meeting at
which persons were present and voting in person. The Secretary of the
Corporation shall prepare a memorandum of the action taken at any such
telephonic meeting.
8.12 TABLE OF CONTENTS; CAPTIONS. The table of contents and captions
used in these Bylaws have been inserted for administrative convenience only and
do not constitute matter to be construed in interpretation.
IN DUE CERTIFICATION WHEREOF, the undersigned, being the Secretary of
COSTILLA ENERGY, INC., confirms the adoption and approval of the foregoing
Bylaws, effective as of the 1st day of July, 1996.
/S/ CLIFFORD N. HAIR, JR.
-------------------------------------------------
CLIFFORD N. HAIR, JR., Secretary
CORPORATE BYLAWS OF COSTILLA ENERGY, INC.
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COSTILLA ENERGY, INC.,
as Issuer,
Subsidiary Guarantors parties hereto
$100,000,000
___% SENIOR SUBORDINATED NOTES DUE 2006
____________________________
INDENTURE
Dated as of ___________, 1996
STATE STREET BANK AND TRUST COMPANY,
Trustee
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939
as amended, and the Indenture, dated as of ________________, 1996
TRUST
INDENTURE
ACT INDENTURE
SECTION SECTION
- -------------------------------------------------------------------------------
Section 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . .7.08; 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . .7.06(a); 7.06(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(c)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(d)
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(e)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . .7.06(e); 7.06(f)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . .4.17; 4.19
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.19
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05(a)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.10
Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.08
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.04
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.05
Section 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.08
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.04
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture.
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<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION. . . . . . . . . . . .1
SECTION 1.01. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. . . 20
SECTION 1.03. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . 21
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE . . . . . . . . 21
SECTION 1.05. ACTS OF HOLDERS. . . . . . . . . . . . . . . . . . . . 22
SECTION 1.06. SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . 22
ARTICLE II
THE NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.01. FORM AND DATING. . . . . . . . . . . . . . . . . . . . 23
SECTION 2.02. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . 24
SECTION 2.03. REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . 25
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. . . . . . . . . . 26
SECTION 2.05. GLOBAL NOTES . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.06. TRANSFER AND EXCHANGE. . . . . . . . . . . . . . . . . 27
SECTION 2.07. REPLACEMENT NOTES. . . . . . . . . . . . . . . . . . . 28
SECTION 2.08. OUTSTANDING NOTES. . . . . . . . . . . . . . . . . . . 29
SECTION 2.09. TEMPORARY NOTES. . . . . . . . . . . . . . . . . . . . 30
SECTION 2.10. CANCELLATION . . . . . . . . . . . . . . . . . . . . . 30
SECTION 2.11. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED . . . . 30
SECTION 2.12. AUTHORIZED DENOMINATIONS . . . . . . . . . . . . . . . 31
SECTION 2.13. COMPUTATION OF INTEREST. . . . . . . . . . . . . . . . 31
SECTION 2.14. PERSONS DEEMED OWNERS. . . . . . . . . . . . . . . . . 31
SECTION 2.15. CUSIP NUMBERS. . . . . . . . . . . . . . . . . . . . . 31
ARTICLE III
REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 3.01. NOTICE TO TRUSTEE. . . . . . . . . . . . . . . . . . . 32
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. . . . . . . . . . . 32
SECTION 3.03. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . 32
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . 33
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. . . . . . . . . . . . . . 33
SECTION 3.06. NOTES REDEEMED IN PART . . . . . . . . . . . . . . . . 34
ARTICLE IV
COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.01. PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . 34
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. . . . . . . . . . . . 34
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST. . . . 35
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SECTION 4.04. CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . 35
SECTION 4.05. MAINTENANCE OF PROPERTY. . . . . . . . . . . . . . . . 35
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. . . . . . . . . . . 36
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF
CONTROL. . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 4.08. LIMITATION ON ASSET SALES. . . . . . . . . . . . . . . 38
SECTION 4.09. OWNERSHIP OF AND LIENS ON CAPITAL STOCK. . . . . . . . 41
SECTION 4.10. UNRESTRICTED SUBSIDIARIES. . . . . . . . . . . . . . . 42
SECTION 4.11. RESTRICTED PAYMENTS. . . . . . . . . . . . . . . . . . 43
SECTION 4.12. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.13. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.14. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.15. LIMITATION ON LAYERING DEBT. . . . . . . . . . . . . . 47
SECTION 4.16. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . 47
SECTION 4.17. REPORTS. . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.18. WAIVER OF STAY, EXTENSION OR USURY LAWS. . . . . . . . 48
SECTION 4.19. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.20. INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . 48
SECTION 4.21. SALE AND LEASEBACK . . . . . . . . . . . . . . . . . . 49
SECTION 4.22. FURTHER INSTRUMENTS AND ACTS . . . . . . . . . . . . . 49
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER . . . . . . . . . . . . 49
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS. . . . . . . . 49
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. . . . . . . . . . . 50
ARTICLE VI
DEFAULTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.01. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . 50
SECTION 6.02. ACCELERATION . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.03. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.04. WAIVER OF PAST DEFAULTS. . . . . . . . . . . . . . . . 53
SECTION 6.05. CONTROL BY MAJORITY. . . . . . . . . . . . . . . . . . 53
SECTION 6.06. LIMITATION ON SUITS. . . . . . . . . . . . . . . . . . 54
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT . . . . . . . . . 54
SECTION 6.08. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . 55
SECTION 6.09. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 6.10. UNDERTAKING FOR COSTS. . . . . . . . . . . . . . . . . 56
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS . . . . . . . . . . . 56
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF THE
NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES . . . . . . . . . . 56
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<PAGE>
SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . 57
SECTION 6.15. DELAY OR OMISSION NOT WAIVER . . . . . . . . . . . . . 57
ARTICLE VII
TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.01. DUTIES OF TRUSTEE. . . . . . . . . . . . . . . . . . . 57
SECTION 7.02. RIGHTS OF TRUSTEE. . . . . . . . . . . . . . . . . . . 58
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . 59
SECTION 7.04. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . 59
SECTION 7.05. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . 59
SECTION 7.06. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO
HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.07. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . 60
SECTION 7.08. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . 61
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. . . . . . . . . . . . . . 63
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. . . . . . . . . . . . . 63
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. . . 64
ARTICLE VIII
DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . . 64
SECTION 8.03. COVENANT DEFEASANCE. . . . . . . . . . . . . . . . . . 65
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. . . . 66
SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; MISCELLANEOUS PROVISIONS. . . . . . . . 67
SECTION 8.06. REINSTATEMENT. . . . . . . . . . . . . . . . . . . . . 68
ARTICLE IX
AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 9.01. WITHOUT CONSENT OF HOLDERS . . . . . . . . . . . . . . 68
SECTION 9.02. WITH CONSENT OF HOLDERS. . . . . . . . . . . . . . . . 69
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES. . . . . . . . . . . 70
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT. . . . . . . . . . 70
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. . . . . 70
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . . 71
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES . . . . . . 71
SECTION 9.08. EFFECT ON SENIOR INDEBTEDNESS. . . . . . . . . . . . . 72
ARTICLE X
SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 10.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . 72
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . 72
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS. . . . . . . 73
SECTION 10.04. ACCELERATION OF NOTES. . . . . . . . . . . . . . . . . 74
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . 74
SECTION 10.06. NOTICE BY COMPANY. . . . . . . . . . . . . . . . . . . 74
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SECTION 10.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . 74
SECTION 10.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . 75
SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY . . . . . 75
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . 75
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . 76
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . 76
SECTION 10.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . 76
ARTICLE XI
SUBSIDIARY GUARANTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 11.01. UNCONDITIONAL GUARANTEE. . . . . . . . . . . . . . . . 76
SECTION 11.02. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN
TERMS. . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 11.03. ADDITION OF SUBSIDIARY GUARANTORS. . . . . . . . . . . 78
SECTION 11.04. RELEASE OF A SUBSIDIARY GUARANTOR. . . . . . . . . . . 79
SECTION 11.05. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY.. . . . 79
SECTION 11.06. CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . 80
SECTION 11.07. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 80
SECTION 11.08. SUBSIDIARY GUARANTEES SUBORDINATED TO GUARANTOR SENIOR
INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . 80
SECTION 11.09. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . 80
SECTION 11.10. DEFAULT ON DESIGNATED GUARANTOR SENIOR INDEBTEDNESS. . 81
SECTION 11.11. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . 82
SECTION 11.12. NOTICE BY SUBSIDIARY GUARANTOR . . . . . . . . . . . . 83
SECTION 11.13. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . 83
SECTION 11.14. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . 83
SECTION 11.15. SUBORDINATION MAY NOT BE IMPAIRED BY SUBSIDIARY
GUARANTORS . . . . . . . . . . . . . . . . . . . . . . 83
SECTION 11.16. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . 83
SECTION 11.17. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . 84
SECTION 11.18. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . 84
SECTION 11.19. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . 85
ARTICLE XII
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 12.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . 85
SECTION 12.02. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 12.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . 85
SECTION 12.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. . . . . 86
SECTION 12.05. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR . . . . . 86
SECTION 12.06. PAYMENTS ON BUSINESS DAYS. . . . . . . . . . . . . . . 86
SECTION 12.07. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . 86
SECTION 12.08. NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . 86
SECTION 12.09. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . 86
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SECTION 12.10. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 87
SECTION 12.11. TABLE OF CONTENTS; HEADINGS. . . . . . . . . . . . . . 87
SECTION 12.12. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 87
SECTION 12.13. FURTHER INSTRUMENTS AND ACTS . . . . . . . . . . . . . 87
EXHIBIT A FORM OF GLOBAL NOTE
EXHIBIT B FORM OF CERTIFICATED NOTE
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INDENTURE, dated as of _______________, 1996, between COSTILLA ENERGY,
INC., a Delaware corporation (the "Company"), having its principal office at
400 West Illinois, Suite 1000, Midland, Texas 79701, the Subsidiary
Guarantors listed on the signature pages hereof (the "Subsidiary
Guarantors"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company, as trustee hereunder (the "Trustee"), having its Corporate Trust
Office at Two International Place, Corporate Trust Department, 4th Floor,
Boston, Massachusetts 02110.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its ____%
Senior Subordinated Notes Due 2006 (the "Notes") of substantially the tenor
and amount hereinafter set forth, and to provide therefor, the Company has
duly authorized the execution and delivery of this Indenture.
Each Subsidiary Guarantor has duly authorized its guarantee of the Notes
and to provide therefor each Subsidiary Guarantor has duly authorized the
execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated by the Trustee and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and each Subsidiary Guarantor,
and to make this Indenture a valid instrument of the Company and each
Subsidiary Guarantor, in accordance with their respective terms, have been
done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in
consideration of the premises and the purchase of the Notes by the Holders
thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except
as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
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"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
any Indebtedness of any other Person existing at the time such other Person
is merged with or into or becomes a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ACT" when used with respect to any Holder, has the meaning set forth in
Section 1.05 hereof.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means, as of the date of
determination, without duplication, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Subsidiaries
calculated in accordance with Commission guidelines before any state or
federal income taxes, as estimated in a reserve report prepared as of the end
of the Company's most recently completed fiscal year, which reserve report is
prepared or audited by independent petroleum engineers, as increased by, as
of the date of determination, the discounted future net revenue of (A)
estimated proved oil and gas reserves of the Company and its Subsidiaries
attributable to any acquisition consummated since the date of such year-end
reserve report, and (B) estimated oil and gas reserves of the Company and its
Subsidiary attributable to extensions, discoveries and other additions and
upward revisions of estimates of proved oil and gas reserves due to
exploration, development, exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve
report which would, in the case of determinations made pursuant to clauses
(A) and (B), in accordance with standard industry practice, result in such
additions or revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report),
and decreased by, as of the date of determination, the discounted future net
revenue of (C) estimated proved oil and gas reserves of the Company and its
Subsidiaries produced or disposed of since the date of such year-end reserve
report and (D) reductions in the estimated oil and gas reserves of the
Company and its Subsidiaries since the date of such year-end reserve report
attributable to downward revisions of estimates of proved oil and gas
reserves due to exploration, development, exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report);
provided that, in the case of each of the determinations made pursuant to
clauses (A) through (D), such increases and decreases shall be as estimated
by the Company's engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a Material
Change that is an increase, then such increases and decreases in the
discounted future net revenue shall be confirmed in writing by independent
petroleum engineers, (ii) the capitalized costs that are attributable to oil
and gas properties of the Company and its Subsidiaries to which no proved oil
and gas reserves are attributed, based on the Company's books and records as
of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the net working capital (which shall be
calculated as all current assets of the Company and its Subsidiaries minus
all current liabilities of the Company and its Subsidiaries, except current
liabilities included in Indebtedness on a date no earlier than the date of
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the Company's latest annual or quarterly financial statements) and (iv) the
greater of (I) the net book value of the other tangible assets of the Company
and its Subsidiaries on a date no earlier than the date of the Company's
latest annual or quarterly financial statements and (II) the appraised value,
as estimated by independent appraisers, of other tangible assets of the
Company and its Subsidiaries as of a date no earlier than the date of the
Company's latest audited financial statements, minus (b) the sum of (i)
minority interests of third parties to the extent included in the calculation
of the immediately preceding clause (a), (ii) the positive remainder, if any,
obtained by subtracting (I) gas balancing underpayments of the Company and
its Subsidiaries reflected in the Company's latest audited financial
statements and not otherwise included in the calculation of the immediately
preceding clause (a) from (II) any gas balancing liabilities of the Company
and its Subsidiaries reflected in the Company's latest audited financial
statements and not otherwise included in the calculation of the immediately
preceding clause (a), and (iii) the discounted future net revenue,
calculated in accordance with Commission guidelines (utilizing the same
prices utilized in the Company's year-end reserve report), attributable to
oil and gas reserves of the Company and its Subsidiaries subject to
participation interests, overriding royalty interests or other interests of
third parties, pursuant to participation, partnership, vendor financing or
other agreements then in effect other than pursuant to Production Payments,
or that otherwise are required to be delivered to third parties other than
pursuant to Production Payments.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS TO CONSOLIDATED INDEBTEDNESS
RATIO" means, at any time, the ratio of Adjusted Consolidated Net Tangible
Assets at such time, to Consolidated Indebtedness at such time.
"ADJUSTED NET ASSETS" of a Subsidiary Guarantor at any date shall mean
the amount by which the fair value of the property of such Subsidiary
Guarantor exceeds the total amount of liabilities of such Subsidiary
Guarantor, including, without limitation, contingent liabilities (after
giving effect to all other fixed and contingent liabilities incurred or
assumed on such date), but excluding liabilities under such Subsidiary
Guarantor's Subsidiary Guarantee at such date.
"AFFILIATE" of any specified Person means (i) any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director
or executive officer of (a) such specified Person or (b) any Person described
in the preceding clause (i). For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of any class, or any series
of any class, of equity securities of a Person, whether or not voting, shall
be deemed to be control.
"AFFILIATE TRANSACTION" has the meaning set forth in Section 4.16 hereof.
"AGENT MEMBER" has the meaning set forth in Section 2.05(a) hereof.
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"APPROVED STOCKHOLDERS" means Cadell S. Liedtke, Michael J. Grella and
Henry G. Musselman and their respective Beneficiaries.
"ASSET SALE" means with respect to any Person, the sale, lease,
conveyance or other disposition, that does not constitute a Restricted
Payment or an Investment, by such Person of any of its assets (including,
without limitation, by way of a Sale and Leaseback Transaction and including the
issuance, sale or other transfer of any Equity Interests in any Subsidiary or
the sale or other transfer of any Equity Interests in any Unrestricted
Subsidiary of such Person) other than to the Company (including the receipt
of proceeds of insurance paid on account of the loss of or damage to any
asset and awards of compensation for any asset taken by condemnation, eminent
domain or similar proceeding, and including the receipt of proceeds of
business interruption insurance), in each case, in one or a series of related
transactions; PROVIDED that, notwithstanding the foregoing, the term "Asset
Sale" shall not include: (a) the sale, lease, conveyance, disposition or
other transfer of all or substantially all of the assets of the Company, as
permitted pursuant to Article V, (b) the sale or lease of hydrocarbons or
other mineral interests in the ordinary course of business and customary in
the Oil and Gas Business, (c) any Production Payment, (d) a transfer of
assets by the Company to a Wholly Owned Subsidiary of the Company or by a
Wholly Owned Subsidiary of the Company to the Company or to another Wholly
Owned Subsidiary of the Company, (e) an issuance of Equity Interests by a
Wholly Owned Subsidiary of the Company to the Company or to another Wholly
Owned Subsidiary of the Company, (f) sale or other disposition of cash or
Cash Equivalents or (g) any lease, abandonment, disposition, relinquishment
or farm out of any oil and gas property that are customary in nature and
scope in the Oil and Gas Business and are entered into in the ordinary course
of the Oil and Gas Business of the Company and its Subsidiaries.
"ASSET SALE OFFER" has the meaning set forth in Section 4.08(c) hereof.
"ASSET SALE PAYMENT DATE" has the meaning set forth in Section
4.08(d)(ii) hereof.
"ASSET SALE PURCHASE PRICE" has the meaning set forth in Section 4.08(c)
hereof
"BENEFICIARY" when used with respect to any individual, means the
spouse, lineal descendants, parents and siblings of any such individual, the
estates and the legal representatives of any such individual and any of the
foregoing and the trustee of any bona fide trust of which any such individual
and any of the foregoing are the sole beneficiaries or grantors.
"BOARD OF DIRECTORS" means, with respect to any Person, the Board of
Directors of such Person or any committee thereof duty authorized to act on
behalf of such Board.
"BOARD RESOLUTION" means, with respect to any Person, a duly adopted
resolution of the Board of Directors in full force and effect at the time of
determination and certified as such by the Secretary or an Assistant
Secretary of such Person.
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"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New
York are authorized or obligated by law, executive order or regulation to
close.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease
which would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, capital stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of capital stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"CASH EQUIVALENT" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities not more than
twelve months from the date of acquisition, (b) U.S. dollar denominated (or
foreign currency fully hedged) time deposits, certificates of deposit,
Eurodollar time deposits or Eurodollar certificates of deposit of (i) any
domestic commercial bank of recognized standing having capital and surplus in
excess of $500 million or (ii) any bank whose short-term commercial paper
rating from S&P is at least A-1 or the equivalent thereof or from Moody's is
at least P-1 or the equivalent thereof (any such bank being an "Approved
Lender"), in each case with maturities of not more than twelve months from
the date of acquisition, and (c) commercial paper issued by any Approved
Lender (or by the parent company thereof) or any variable rate notes issued
by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent
thereof) or better by S&P or P-1 (or the equivalent thereof) or better by
Moody's and maturing within twelve months of the date of acquisition.
"CERTIFICATED NOTES" means Notes issued in definitive, fully registered
form to beneficial owners of interests in the Global Note pursuant to Section
2.06(a) hereof.
"CHANGE OF CONTROL" means
(i) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) other than the Approved
Stockholders, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of more than 50%
of the total Voting Stock of the Company; or
(ii) the Company is merged with or into or consolidated with
another Person and, immediately after giving effect to the merger or
consolidation, (A) less than 50% of the total voting power of the
outstanding Voting Stock of the surviving or resulting Person is then
"beneficially owned" (within the meaning of Rule 13d-3 under the
Exchange Act) in the aggregate by the stockholders of the Company
immediately prior to such merger or consolidation, and (B)
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<PAGE>
any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of
the Exchange Act) other than the Approved Stockholders, has become the
direct or indirect "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 50% of the total voting power of the
Voting Stock of the surviving or resulting Person; or
(iii) the Company, either individually or in conjunction with one
or more Subsidiaries, sells, assigns, conveys, transfers, leases or
otherwise disposes of, or the Subsidiaries sell, assign, convey,
transfer, lease or otherwise dispose of, all or substantially of the
properties of the Company and the Subsidiaries, taken as a whole (either
in one transaction or a series of related transactions) including
Capital Stock of the Subsidiaries, to any Person (other than the Company
or a Wholly Owned Subsidiary); or
(iv) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors
of the Company then in office; or
(v) the liquidation or dissolution of the Company.
"CHANGE OF CONTROL OFFER" has the meaning set forth in Section 4.07(a)
hereof.
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth in Section
4.07(a) hereof.
"CHANGE OF CONTROL PURCHASE PRICE" has the meaning set forth in Section
4.07(a) hereof.
"CLEARING AGENCY" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the United States Securities and Exchange Commission,
as from time to time constituted, created under the Exchange Act, or, if at
any time after the execution of this Indenture such commission is not
existing and performing the duties now assigned to it under the Trust
Indenture Act, the body performing such duties at such time.
"COMPANY" means the party named as such in the preamble to this
Indenture until a successor replaces it pursuant to the applicable provisions
hereof and, thereafter, means such successor.
"COMPANY ORDER" means a written order signed in the name of the Company
by (i) its Chairman of the Board, President, a Vice Chairman or a Vice
President, and (ii) its Treasurer, an Assistant Treasurer, its Secretary or
an Assistant Secretary.
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CONSOLIDATED EBITDA means, with respect to any Person for any period,
the sum of, without duplication, (i) the Consolidated Net Income of such
Person and its Subsidiaries for such period, plus (ii) to the extent deducted
in the computation of such Consolidated Net Income, the Consolidated Interest
Expense for such period, plus (iii) to the extent deducted in the computation
of such Consolidated Net Income, amortization of deferred financing charges
for such period, plus (iv) provision for taxes based on income or profits for
such period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (v) to the extent deducted in
the computation of such Consolidated Net Income, consolidated depreciation,
depletion, amortization and other noncash charges of such Person and its
Subsidiaries required to be reflected as expenses on the books and records of
such Person, plus (vi) to the extent deducted in the computation of such
Consolidated Net Income, consolidated exploration and abandonment expenses of
such Person and its Subsidiaries for such periods, minus (vii) cash payments
with respect to any nonrecurring, noncash charges previously added back
pursuant to clause (v), and excluding (viii) the impact of foreign currency
translations. Notwithstanding the foregoing, the provision for taxes based
on the income or profits of, and the depreciation, depletion and amortization
and other noncash charges of, and the exploration and abandonment expenses
of, a Subsidiary of a Person shall be added to Consolidated Net Income to
compute Consolidated EBITDA only to the extent (and in the same proportion)
that the Net Income of such Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to such
Person by such Subsidiary without prior approval (unless such approval has
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person for any
time, the Indebtedness of such Person and its Subsidiaries at such time as
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST COVERAGE RATIO" means with respect to any Person
for any period, the ratio of (i) Consolidated EBITDA of such Person and its
Subsidiaries for such period to (ii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period. In the event that the Company
or any of its Subsidiaries incurs, assumes, Guarantees or repays or redeems
any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the four-quarter
reference period for which the Consolidated Interest Coverage Ratio is being
calculated but on or prior to the date on which the event for which the
calculation of the Consolidated Interest Coverage Ratio is made (the
"Calculation Date"), then the Consolidated Interest Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. For purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on
or prior to the Calculation Date shall be deemed
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to have occurred on the first day of the four-quarter reference period, and
(ii) the Consolidated EBITDA attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Consolidated
Interest Expense attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense will not be
obligations of the referent Person or any of its Subsidiaries following the
Calculation Date.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for
any period, the sum, without duplication, of (i) the consolidated interest
expense of such Person and its Subsidiaries for such period including,
without limitation, amortization of original issue discount, noncash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations, but excluding amortization of deferred
financing charges for such period, and (ii) the consolidated interest
expense of such Person and its Subsidiaries that was capitalized during such
period, and (iii) any interest expense on Indebtedness of another Person that
is Guaranteed by such Person or one of its Subsidiaries or secured by a Lien
on assets of such Person or one of its Subsidiaries (whether or not such
Guarantee or Lien is called upon), and (iv) the product of (a) all cash
dividend payments (and noncash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person payable to a
party other than the Company or a Wholly Owned Subsidiary, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, on a consolidated basis and in
accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Wholly Owned Subsidiary thereof,
(ii) the Net Income of any Subsidiary shall be excluded to the extent that
the declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (unless such approval has been
obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded, and (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, unless distributed to the Company or one of its
Subsidiaries.
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"CONSOLIDATED NET WORTH" means, with respect to any Person as of any
date, the consolidated stockholders' equity of such Person and its
consolidated Subsidiaries as of such date less (w) the amount of such
stockholders' equity attributable to Disqualified Stock, (x) all write-ups
subsequent to the date of this Indenture in the book value of any asset owned
by such Person or a consolidated Subsidiary of such Person (other than
purchase accounting adjustments made, in connection with any acquisition of
any entity that becomes a consolidated Subsidiary of such Person after the
date of this Indenture to the book value of the assets of such entity), (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and
(z) all unamortized debt discount and expense and unamortized deferred charges
as of such date, all of the foregoing determined in accordance with GAAP.
"CORPORATE TRUST OFFICE" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date of execution of this Indenture,
located at Two International Place, Corporate Trust Department, 4th Floor,
Boston, Massachusetts 02110.
"COVENANT DEFEASANCE" has the meaning set forth in Section 8.03 hereof.
"CREDIT FACILITY" means a credit facility that may be entered into among
the Company and the lenders parties thereto, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, restated or refinanced from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DEFAULTED INTEREST" has the meaning set forth in Section 2.11 hereof.
"DEPOSITARY" means The Depository Trust Company, its nominees, and their
respective successors.
"DESIGNATED GUARANTOR SENIOR INDEBTEDNESS" means (i) so long as the Senior
Bank Indebtedness is outstanding, any Subsidiary Guarantor's Indebtedness in
respect of the Senior Bank Indebtedness and (ii) thereafter, any other Guarantor
Senior Indebtedness permitted under this Indenture the principal amount of which
is $15.0 million or more and that has been designated by the Company as
"Designated Guarantor Senior Indebtedness"; PROVIDED that for purposes of
Section 11.10(a) hereof, "Designated Guarantor Senior Indebtedness" shall also
mean any other Guarantor Senior Indebtedness permitted under this Indenture the
principal amount of which is $15.0 million or more.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Bank
Indebtedness is outstanding, the Senior Bank Indebtedness and (ii) thereafter,
any other Senior Indebtedness
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permitted under this Indenture the principal amount of which is $15.0 million
or more and that has been designated by the Company as "Designated Senior
Indebtedness"; PROVIDED that for purposes of Section 10.03(a) hereof,
"Designated Senior Indebtedness" shall also mean any other Senior
Indebtedness permitted under this Indenture the principal amount of which is
$15.0 million or more.
"DISQUALIFIED STOCK" means (a) with respect to any Person, Capital Stock
of such Person that, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of
any event (unless any redemption or repurchase of such Capital Stock upon the
occurrence of such event is required by any such terms, but only to the extent
that a payment in respect thereof would be permitted under Section 4.11 hereof),
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the Holder thereof, in whole or
in part, on or prior to the date which is one year after the date on which the
Notes mature and (b) with respect to any Subsidiary of such Person (including
with respect to any Subsidiary of the Company), any Capital Stock other than
any common stock with no preference, privileges, or redemption or repayment
provisions.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" means dollar denominated
payment obligations of the Company or any of its Subsidiaries that are or,
upon the occurrence of a contingent event, would be recorded as liabilities
in accordance with GAAP, together with all undertakings and obligations of
the Company or any of its Subsidiaries in connection therewith, which
obligations will be deemed to constitute Indebtedness for borrowed money for
purposes of this Indenture.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding
prior to, on or after the date of this Indenture.
"EQUITY OFFERING" means an offer and sale of Qualified Stock of the Company
to a Person other than an Affiliate of the Company.
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01 hereof.
"EXCESS PROCEEDS" has the meaning set forth in Section 4.08(b) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXEMPT AFFILIATE TRANSACTIONS" means (a) transactions between or among
the Company and/or its Wholly Owned Subsidiaries, (b) advances not to exceed
$1,000,000 at any time outstanding to officers of the Company or any Subsidiary
of the Company in the ordinary course of business to provide for the payment
of reasonable expenses incurred by such persons in the performance of their
responsibilities to the Company or such Subsidiary or in connection with any
relocation, (c) fees and compensation paid to and indemnity provided on behalf
of directors, officers or employees of the Company or any Subsidiary of the
Company in the ordinary course of business, (d) any employment
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agreement that is in effect on the date of the Indenture in the ordinary
course of business and any such agreement entered into by the Company or a
Subsidiary after the date of this Indenture in the ordinary course of
business of the Company or such Subsidiary and (e) payments and transactions
under Indebtedness of A&P Meter Service and Supply, Inc. ("A&P")
outstanding on the date of this Indenture and performance of and payment for
services provided by A&P to the Company and its Subsidiaries in the ordinary
course of business consistent with past practices.
"FUNDING GUARANTOR" has the meaning specified in Section 11.06.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of American
Institute of Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board or in such other statements by
such other entity as have been approved by a significant segment of the
accounting profession, which are in effect on the date of this Indenture.
"GLOBAL NOTES" has the meaning set forth in Section 2.01(c) hereof.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means (i) all Guarantees or other
Indebtedness of a Subsidiary Guarantor in respect of the Senior Bank
Indebtedness and (ii) any other indebtedness permitted to be incurred by a
Subsidiary Guarantor under the terms of this Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated in right of payment to any Indebtedness for money borrowed.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (w) any liability for federal, state, local or
other taxes owed or owing by a Subsidiary Guarantor, (x) any Indebtedness of
a Subsidiary Guarantor to any of the Company's Subsidiaries, Unrestricted
Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of this Indenture.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in (a)
interest rates, (b) the value of foreign currencies and (c) Oil and Gas
Purchase and Sales Contracts.
"HOLDER" means (i) in the case of any Certificated Note, the Person in
whose name such Certificated Note is registered in the Security Register and
(ii) in the case of any Global Note, the Depositary.
"INDEBTEDNESS" means, with respect to any Person, without duplication,
(a) all liabilities of such Person for borrowed money or for the deferred
purchase price of property or services (excluding
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any trade accounts payable and other accrued current liabilities incurred in
the ordinary course of business), and all liabilities of such Person incurred
in connection with any letters of credit, bankers' acceptances or other
similar credit transactions or any agreement to purchase, redeem, exchange,
convert or otherwise acquire for value any Capital Stock of such Person, or
any warrants, rights or options to acquire such Capital Stock outstanding on
the date of this Indenture or thereafter, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (b) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, if, and
to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (c) all
Indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary
course of business, (d) all Capitalized Lease Obligations of such Person, (e)
all Indebtedness referred to in the preceding clauses of other Persons and
all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured) (f) all Production Payments
of such Person, (g) all guarantees by such Person of Indebtedness referred to
in this definition, (h) all Disqualified Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends and (i) all obligations of such Person under or in respect
to currency exchange contracts, oil or natural gas price hedging arrangements
and Hedging Obligations. For purposes hereof, the "maximum fixed repurchase
price" of Disqualified Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock
as if Disqualified Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Stock, such fair market value shall be determined in good faith
by the board of directors of the issuer of such Disqualified Stock; provided,
however, that if such Disqualified Stock is not at the date of determination
permitted or required to be repurchased, the "maximum fixed repurchase price"
shall be the book value of such Disqualified Stock.
"INDENTURE" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including,
for all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument, and any such supplemental indenture, respectively.
"INTEREST PAYMENT DATE" means the Stated Maturity of an installment of
interest on the Notes.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees of
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Indebtedness or other obligations), advances or capital contributions (excluding
advances to officers and employees of the type specified in clause (b) of the
definition of Exempt Affiliate Transactions), purchases or other acquisitions
for consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP or the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets of any other
Person.
"ISSUE DATE" means the date on which the Notes are first authorized and
delivered under this Indenture.
"LEGAL DEFEASANCE" has the meaning set forth in Section 8.02 hereof.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"MATERIAL CHANGE" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal
quarter in the discounted future net cash flows from proved oil and gas
reserves of the Company and its Subsidiaries calculated in accordance with
clause (a)(i) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation
of Material Change: (i) any acquisition during the quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and on
which a report or reports exists and (ii) any disposition of properties
existing at the beginning of such quarter that have been disposed of pursuant
to the provisions of this Indenture described below under Section 4.08.
"MATURITY" means, when used with respect to a Note, the date on which
the principal of such Note becomes due and payable as provided therein or in
this Indenture, whether on the date specified in such Note as the fixed date
on which the principal of such Note is due and payable, on the Change of
Control Payment Date or the Asset Sale Payment Date, or by declaration of
acceleration, call for redemption or otherwise.
"MOODY'S" means Moody's Investors Service, Inc., or, if Moody's
Investors Service, Inc. shall cease rating the specified debt securities and
such ratings business with respect thereto shall have been transferred to a
successor Person, such successor Person; PROVIDED that if Moody's Investors
Service, Inc. ceases rating the specified debt securities and its ratings
business with respect thereto shall not have been transferred to any
successor Person or such successor Person is S&P, then "Moody's" shall mean
any other nationally recognized rating agency (other than S&P) that rates the
specified debt securities and that shall have been designated by the Company
in an Officers' Certificate.
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<PAGE>
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to Sale and Leaseback Transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries
or the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries, (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss), and (iii) any gain (but not loss) from
currency exchange transactions not in the ordinary course of business
consistent with past practice.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof, and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither
the Company nor any of its Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a Subsidiary Guarantor
or otherwise), or (c) constitutes the lender; and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its Stated Maturity.
"NOTES" has the meaning set forth in the Recitals of the Company and more
particularly means any of the Notes authenticated and delivered under this
Indenture.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER" means the Chairman of the Board of Directors, a Vice Chairman
of the Board of Directors, the President, a Vice President, the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company or any Subsidiary
Guarantor.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the Chairman
of the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President of the Company or
any Subsidiary Guarantor, and (ii) the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or
an Assistant Secretary
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of the Company or any Subsidiary Guarantor, and delivered to the Trustee,
which certificate shall comply with the provisions of Section 11.04 hereof;
PROVIDED that any Officers' Certificate delivered pursuant to the first
paragraph of Section 4.19 hereof shall be signed by the Chief Executive
Officer, the Chief Financial Officer or the Chief Accounting Officer.
"OIL AND GAS BUSINESS" means the business of the exploration for, and
development, acquisition, and production of hydrocarbons, together with
activities ancillary thereto (including with limitation, the gathering,
processing, treatment, marketing and transportation of such production) and
other related energy and natural resources businesses.
"OIL AND GAS PURCHASE AND SALE CONTRACT" means with respect to any
Person, any oil and gas agreements and other agreements or arrangements or
any combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural
gas price fluctuations.
"OPINION OF COUNSEL" means a written opinion from legal counsel (who may
be counsel to the Company, any Subsidiary Guarantor or the Trustee) who is
acceptable to the Trustee, which opinion shall comply with the provisions of
Section 11.04 hereof; provided that any Opinion of Counsel delivered pursuant
to Section 8.04 hereof shall not be rendered by an employee of the Company or
any of its Subsidiaries.
"PARI PASSU INDEBTEDNESS" means Indebtedness of (a) the Company that is
PARI PASSU with or subordinated to the Notes (other than the Notes) or (b)
any Subsidiary Guarantor that is PARI PASSU with or subordinated to such
Subsidiary Guarantor's Subsidiary Guarantee (other than such Subsidiary
Guarantee or Indebtedness secured by such Subsidiary Guarantee).
"PAYING AGENT" means any Person authorized by the Company to make payments
of principal, premium or interest with respect to the Notes on behalf of the
Company.
"PERMITTED INVESTMENTS" means (a) any Investments by the Subsidiaries of
the Company in the Company; (b) any Investments in Cash Equivalents; (c)
Investments made as a result of the receipt of noncash consideration from an
Asset Sale that was made pursuant to and in compliance with Section
4.08(a)(ii); (d) Investments outstanding as of the date of this Indenture;
(e) Investments in Wholly Owned Subsidiaries that is engaged in the Oil and
Gas Business and Investments in any Person that, as a result of such
Investment (or a series of substantially contemporaneous Investments pursuant
to a single plan) (x) such other Person becomes a Wholly Owned Subsidiary
engaged in the Oil and Gas Business or (y) such other Person that is engaged
in the Oil and Gas Business is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to the Company or
a Wholly Owned Subsidiary in a transaction permitted under the Indenture; (f)
entry into operating agreements, joint ventures, partnership agreements,
working interests, royalty interests, mineral leases, processing agreements,
farm-out agreements, contracts for the sale, transportation or exchange of
oil and natural gas, unitization agreements, pooling arrangements, area of
mutual interest agreements or other similar or customary agreements,
transactions, properties, interests or arrangements, and Investments and
expenditures in connection therewith or pursuant thereto, in each case made
or entered into in the ordinary course of the Oil and Gas Business,
excluding, however, Investments in corporations; (g) entry into any hedging
arrangements in the ordinary course of business for the purpose of protecting
the Company's or any Subsidiary's production against fluctuations in oil or
natural gas prices; (h) shares of money mutual or similar funds having assets
in excess of $500,000,000, and (i) Investments in an aggregate amount not to
exceed $5,000,000 at any one time outstanding.
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"PERMITTED LIENS" means (a) liens for taxes, assessments and
governmental charges not then due or the validity of which is being contested
in good faith by appropriate proceedings, promptly instituted and diligently
conducted, and for which adequate reserves have been established to the
extent required by GAAP; (b) mechanics', workmen's, materialman's, operator's
or similar liens arising in the ordinary course of business; (c) easements,
rights of way, restrictions and other similar encumbrances incurred in the
ordinary course of business or minor imperfections in title that do not
impair the value of property for its intended use; (d) liens on, or related
to, properties to secure all or part of the costs incurred in the ordinary
course of business of exploration, drilling, development or operation
thereof; (e) judgment and attachment liens not giving rise to an Event of
Default or liens created by or existing from any litigation or legal
proceeding that are currently being contested in good faith by appropriate
proceedings, promptly instituted and diligently conducted, and for which
adequate reserves have been made to the extent required by GAAP; (f) liens on
deposits made in the ordinary course of business; (g) liens in favor of
collecting or payor banks having a right of selloff, revocation, refund or
chargeback with respect to money or instruments of the Company or any
Subsidiary on deposit with or in possession of such bank (h) liens on
pipeline or pipeline facilities which arise out of operation of law; (i)
liens on deposits to secure public or statutory obligations or in lieu of
surety or appeal bonds entered into in the ordinary course of business; (j)
liens reserved in oil and gas leases for bonus or rental payments and for
compliance with the terms of such leases; and (k) liens arising under
partnership agreements, oil and gas leases, farmout agreements, division
orders, contracts for the sale, purchase, exchange, transportation or
processing of oil, gas or other hydrocarbons, unitization and pooling
declarations and agreements, development agreements, operating agreements,
area of mutual interest agreements and other agreements that are customary in
the Oil and Gas Business.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund, other Indebtedness of the Company or any of its Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal or accrued amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a Weighted Average Life to
Maturity and a final maturity date equal to or greater than the Weighted
Average Life to Maturity and a final maturity date, respectively, of the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
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"PERSON" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"PRO FORMA" means, with respect to any calculation made or required to
be made pursuant to the terms hereof, a calculation in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act (to the
extent applicable), as interpreted in good faith by the Board of Directors of
the Company, or otherwise, a calculation made in good faith by the Board of
Directors of the Company, as the case may be.
"PROPERTY" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed,
tangible or intangible, excluding Capital Stock in any other Person.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in
the business of such Person or any of its Subsidiaries in an amount that is
not more than 100% of the cost of such property, and incurred within 180 days
after the date of such construction or acquisition (excluding accounts
payable to trade creditors incurred in the ordinary course of business).
"QUALIFIED STOCK" means, for any Person, any and all Capital Stock of
such Person, other than Disqualified Stock.
"RECORD DATE" means, for the interest payable on any Interest Payment
Date, the date specified in Section 2.11 hereof.
"REDEMPTION DATE" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the date fixed for redemption of such Notes
pursuant to the terms of the Notes and this Indenture.
"REDEMPTION PRICE" means when used with respect to any Note or part
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and
unpaid interest, if any, to the Redemption Date.
"REGISTRAR" has the meaning set forth in Section 2.03 hereof.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative for any Senior Indebtedness or Guarantor Senior Indebtedness.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
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"RESTRICTED PAYMENT" has the meaning set forth in Section 4.11 hereof.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill
Corporation, or, if Standard & Poor's Ratings Group shall cease rating the
specified debt securities and such ratings business with respect thereto
shall have been transferred to a successor Person, such successor Person;
PROVIDED that if Standard & Poor's Ratings Group ceases rating the specified
debt securities and its ratings business with respect thereto shall not have
been transferred to any successor Person or such successor Person is Moody's,
then "S&P" shall mean any other nationally recognized rating agency (other
than Moody's) that rates the specified debt securities and that shall have
been designated by the Company in an Officers' Certificate.
"SALE AND LEASEBACK TRANSACTION" means, with respect to the Company or
any of its Subsidiaries, any arrangement with any Person providing for the
leasing by the Company or any of its Subsidiaries as lessee of any principal
property, acquired or placed into service more than 180 days prior to such
arrangement (except leases of two years of less), whereby such property has
been or is to be sold or transferred by the Company or any of its
Subsidiaries to such Person or its Affiliates.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITY REGISTER" has the meaning set forth in Section 2.03 hereof.
"SENIOR BANK INDEBTEDNESS" means the Indebtedness outstanding under the
Credit Facility.
"SENIOR INDEBTEDNESS" means (i) the Senior Bank Indebtedness and (ii)
any other Indebtedness permitted to be incurred by the Company under the
terms of this Indenture, unless the instrument under which such Indebtedness
is incurred expressly provides that it is subordinated in right of payment to
any Indebtedness for money borrowed. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries,
Unrestricted Subsidiaries or other Affiliates, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of this Indenture.
"SENIOR REVOLVING INDEBTEDNESS" means revolving credit borrowings and
letters of credit under the Credit Facility and/or any successor facility or
facilities.
"SPECIAL RECORD DATE" means a date fixed by the Trustee pursuant to
Section 2.11 for the payment of Defaulted Interest.
"STATED MATURITY" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred), and, when
used with respect to any installment of interest on such security, the fixed
date on which such installment of interest is due and payable.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
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or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). Notwithstanding the foregoing, an Unrestricted Subsidiary shall
not be a Subsidiary of the Company for any purposes of this Indenture.
"SUBSIDIARY GUARANTEE" means the guarantee of the Notes by a Subsidiary
Guarantor pursuant to Article XI or pursuant to a supplemental indenture
pursuant to which such Subsidiary Guarantor guarantees the Notes.
"SUBSIDIARY GUARANTOR" means (a) Costilla Petroleum Corporation,
Costilla Pipeline Company, Statewide Minerals Corporation and Valley
Gathering Company, (b) each of the Subsidiaries that becomes a Subsidiary
Guarantor pursuant to Article XI hereof and (c) each of the Subsidiaries
executing a supplemental indenture in which such Subsidiary agrees to
guarantee the Notes and to be bound by the terms of this Indenture.
"TEMPORARY NOTES" has the meaning set forth in Section 2.09 hereof.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 (15 U.S.C.
SECTION Section 77aaa-77bbbb) as in effect on the date of this Indenture
except as required by Section 9.04 hereof; provided that in the event the
Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act"
means, to the extent required by any such amendment, the Trust Indenture Act
of 1939, as so amended.
"TRUST OFFICER" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer this Indenture.
"TRUSTEE" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture
and, thereafter, means such successor.
"U.S. GOVERNMENT OBLIGATIONS" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b)
obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof; and (ii) depository receipts
issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as
custodian with respect to any U.S. Government Obligation which is specified
in clause (i) above and held by such bank for the account of the holder of
such depository receipt, or with respect to any specific payment of principal
or interest on any U.S. Government Obligation which is so specified and held;
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of principal or interest of the
U.S. Government Obligation evidenced by such depository receipt. Investments
in U.S. Government Obligations may be made through or with the Trustee.
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"UNRESTRICTED SUBSIDIARY" means each entity, if designated by the Board
of Directors of the Company as Unrestricted Subsidiaries pursuant to a Board
Resolution pursuant to Section 4.10 hereof.
"VOLUMETRIC PRODUCTION PAYMENTS" means volumetric production payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as deferred revenue in
accordance with GAAP, together with all undertakings and obligations of the
Company or any of its Subsidiaries in connection therewith, which will be
deemed to constitute debt for borrowed money for purpose of this Indenture.
"VOTING STOCK" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the
election of directors.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the product obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payments at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such
Person (i) all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Subsidiaries of such Person or
(ii) organized in a foreign jurisdiction and is required by the applicable
laws and regulations of such foreign jurisdiction to be partially owned by
the goernment of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Subsidiary to
transact business in such foreign jurisdiction, provided that such Person or
one or more Wholly Owned Subsidiaries of such Person, owns the remaining
Capital Stock or ownership interest in such Subsidiary and, by contract or
otherwise, controls the management and business of such Subsidiary and
derives the economic benefits of ownership of such Subsidiary to
substantially the same extent as if such Subsidiary were a wholly owned
Subsidiary. Unrestricted Subsidiaries shall not be included in the definition
of Wholly Owned Subsidiary for any purposes of this Indenture.
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. (a)
This Indenture is expressly made subject to the Trust Indenture Act as if
this Indenture were, on the date of this Indenture, subject to the Trust
Indenture Act under the provisions of such statute and such provisions are
incorporated by reference in this Indenture.
(b) Whenever this Indenture refers to a provision of the Trust
Indenture Act, the provision is incorporated by reference in and made a part
of this Indenture. The following Trust Indenture Act terms incorporated by
reference in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
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"obligor" on the indenture securities means the Company or other
obligor on the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(a) the words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
(d) the principal amount of any noninterest bearing or other discount
security, at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP; and
(e) when used with respect to the Notes, the term "principal amount"
shall mean the principal amount thereof at the Stated Maturity of such
principal amount.
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such
Persons as to other matters, and any such Person may certify or give an
opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company or a Subsidiary
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such
officer knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to the matters upon
which his certificate or opinion is based are erroneous. Any such certificate
or Opinion of Counsel may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or
officers of the Company or a Subsidiary Guarantor stating that the
information with respect to such factual matters is in the possession of the
Company or such Subsidiary Guarantor, unless such counsel knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
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Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.05. ACTS OF HOLDERS. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture
to be given or taken by Holders may be embodied in and evidenced by one or
more instruments of substantially similar tenor signed by such Holders in
person or by an agent duly appointed in writing; and, except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee and, where it is
hereby expressly required, to the Company and the Subsidiary Guarantors.
Such instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to Section 7.01) conclusive in favor of the
Trustee and the Company and the Subsidiary Guarantors, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of a notary public or other officer
authorized by law to take acknowledgments of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the
execution thereof. Where such execution is by a signer acting in a capacity
other than such signer's individual capacity, such certificate or affidavit
shall also constitute sufficient proof of the signer's authority. The fact
and date of the execution of any such instrument or writing, or the authority
of the person executing the same, may also be proved in any other manner
which the Trustee deems sufficient.
SECTION 1.06. SATISFACTION AND DISCHARGE. This Indenture shall cease
to be of further effect and the Trustee, on receipt of a Company Order
requesting such action, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when (a) either (i) all
outstanding Notes have been delivered to the Trustee for cancellation or (ii)
all such Notes not theretofore delivered to the Trustee for cancellation have
become due and payable and the Company or the Subsidiary Guarantors have
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for the purpose (x) money in an amount, (y) U.S. Government
Obligations or (z) a combination thereof, sufficient, in the case of deposits
pursuant to the foregoing clauses (y) or (z), as established in the opinion
of a nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge the entire indebtedness on such Notes, for principal (and premium,
if any) and interest, if any, to the date of such deposit together with
irrevocable instructions from the Company in form and substance satisfactory
to the Trustee directing the Trustee to apply such funds to the payment
thereof; (b) the Company or the Subsidiary Guarantors have paid or caused to
be paid all other sums payable hereunder by the Company; and (c) the Company
or the Subsidiary Guarantors have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with. Notwithstanding the satisfaction and
discharge of this Indenture pursuant to this Section 1.06, the obligations of
the Company and the Subsidiary Guarantors to the Trustee under Section 7.07
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hereof, and, if money shall have been deposited with the Trustee in trust for
the Holders pursuant to this Section 1.06, the obligations of the Trustee
under this Section 1.06 hereof shall survive.
All money deposited with the Trustee pursuant to this Section 1.06 shall
be held in trust and applied by it, in accordance with the provisions of the
Notes and this Indenture, to the payment, either directly or through any
Paying Agent, to the Persons entitled thereto, of the principal (and premium,
if any) and interest, if any, for the payment of which such money has been
deposited with the Trustee. If the Trustee or Paying Agent is unable to
apply any money [or U.S. Government Obligations] in accordance with this
Section 1.06 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's and the Subsidiary
Guarantors' obligations under this Indenture and the Notes shall be revived
and reinstated as though no deposit had occurred pursuant to this Section
1.06 until such time as the Trustee or Paying Agent is permitted to apply all
such money or U.S. Government Obligations in accordance with this Section
1.06; PROVIDED, that if the Company or the Subsidiary Guarantors have made
any payment on any Notes because of the reinstatement of its obligations, the
Company and the Subsidiary Guarantors shall be subrogated to the rights of
the Holders of such Notes to receive such payment from the cash or U.S.
Government Obligations held by the Trustee or Paying Agent.
The Company and the Subsidiary Guarantors shall pay and indemnify the
Trustee against any tax, fee or other charges imposed on or assessed against
the U.S. Government Obligations deposited pursuant to this Section 1.06 or the
principal and interest received in respect thereof other than any such tax, fee
or other charge which by law is for the account of the Holders of outstanding
Notes.
ARTICLE II
THE NOTES
SECTION 2.01. FORM AND DATING. (a) The Notes and the certificate of
authentication of the Trustee thereon shall be substantially in the form of
Exhibit A or Exhibit B hereto, as applicable, which are hereby incorporated
in and expressly made a part of this Indenture.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed,
lithographed or engraved thereon, (i) as the Company may deem appropriate and
as are not inconsistent with the provisions of this Indenture, (ii) such as
may be required to comply with this Indenture, any law or any rule of any
securities exchange on which the Notes may be listed and (iii) such as may be
necessary to conform to customary usage. Each Note shall be dated the date
of its authentication by the Trustee.
(c) The Notes shall be issued initially in the form of a permanent,
global note in definitive, fully registered form, without coupons,
substantially in the form of Exhibit A hereto (the "Global Note"). Upon
issuance, such Global Note shall be duly executed by the Company and
authenticated by the Trustee as hereinafter provided and deposited with the
Trustee as custodian for the Depositary.
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Any Certificated Note that may be issued pursuant to Section 2.06(a) hereof,
shall be issued in the form of a note in definitive, fully registered form,
without coupons, substantially in the form set forth in Exhibit B hereto.
Upon issuance, any such Certificated Note shall be duly executed by the
Company and authenticated by the Trustee as hereinafter provided.
(d) Each Global Note shall bear the following legend on the face thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO COSTILLA ENERGY, INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, AND
NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS
IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE
WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED
AS OF ________________, 1996, BETWEEN COSTILLA ENERGY, INC. AND THE
TRUSTEE NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
(e) Definitive Notes shall be typed, printed, lithographed or engraved
or produced by any combination of such methods or produced in any other
manner permitted by the rules of any securities exchange on which such Notes
may be listed, all as determined by the officers of the Company executing
such Notes, as evidenced by their execution of such Notes.
SECTION 2.02. EXECUTION AND AUTHENTICATION. The aggregate principal
amount of Notes outstanding at any time shall not exceed $100,000,000 except
as provided in Section 2.07 hereof. The Notes shall be executed on behalf of
the Company by its Chief Executive Officer, its President, any Executive Vice
President or any Senior Vice President, under its corporate seal reproduced
or imprinted on the Notes by facsimile or otherwise, and shall be attested by
the Company's Secretary or one of its Assistant Secretaries, in each case by
manual or facsimile signature.
The Notes shall be authenticated by manual signature of an authorized
signatory of the Trustee and shall not be valid for any purpose unless so
authenticated.
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In case any officer of the Company whose signature shall have been
placed upon any of the Notes shall cease to be such officer of the Company
before authentication of such Notes by the Trustee and the issuance and
delivery thereof, such Notes may, nevertheless, be authenticated by the
Trustee and issued and delivered with the same force and effect as though
such Person had not ceased to be such officer of the Company.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Notes for original issuance in an aggregate principal
amount not to exceed $100,000,000 in the form of the Global Note. Such
Company Order shall specify the amount of Notes to be authenticated and the
date on which the Notes are to be authenticated and shall further provide
instructions concerning registration, amounts for each Holder and delivery.
Upon the occurrence of any event specified in Section 2.06(a) hereof and
compliance by the Company with the provisions of the paragraph preceding the
immediately preceding paragraph, the Company shall execute and the Trustee
shall authenticate and make available for delivery to each beneficial owner
identified by the Depositary, in exchange for such beneficial owner's
interest in the Global Note or Certificated Notes, as the case may be,
representing Notes theretofore represented by the Global Note.
A Note shall not be valid or entitled to any benefit under this
Indenture or obligatory for any purpose unless executed by the Company and
authenticated by the manual signature of the Trustee as provided herein. The
signature of an authorized signatory of the Trustee shall be conclusive
evidence, and the only evidence, that such Note has been authenticated and
delivered under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Notes. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. Any authenticating agent of
the Trustee shall have the same rights hereunder as any Registrar or Paying
Agent.
SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain,
pursuant to Section 4.02 hereof, an office or agency where the Notes may be
presented for registration of transfer or for exchange. The Company shall
cause to be kept at such office a register (the register maintained in such
office being herein sometimes referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the
Company shall provide for the registration of Notes and of transfers of Notes
entitled to be registered or transferred as provided herein. The Trustee, at
its Corporate Trust Office, is initially appointed "Registrar" for the
purpose of registering Notes and transfers of Notes as herein provided. The
Company may, upon written notice to the Trustee, change the designation of
the Trustee as Registrar and appoint another Person to act as Registrar for
purposes of this Indenture. If any Person other than the Trustee acts as
Registrar, the Trustee shall have the right at any time, upon reasonable
notice, to inspect or examine the Security Register and
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to make such inquiries of the Registrar as the Trustee shall in its
discretion deem necessary or desirable in performing its duties hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of
the Trust Indenture Act and shall implement the provisions of this Indenture
that relate to such Registrar or Paying Agent. Prior to the designation of
any such Person, the Company shall, by written notice (which notice shall
include the name and address of such Person), inform the Trustee of such
designation. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such.
Subject to Section 2.06, upon surrender for registration of transfer of
any Note at an office or agency of the Company designated for such purpose,
the Company shall execute, and the Trustee shall authenticate and make
available for delivery, in the name of the designated transferee or
transferees, one or more new Notes of any authorized denomination or
denominations, of like tenor and aggregate principal amount, all as requested
by the transferor.
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee or the Registrar)
be duly endorsed, or be accompanied by a duly executed instrument of transfer
in form satisfactory to the Company, the Trustee and the Registrar, by the
Holder thereof or such Holder's attorney duly authorized in writing.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to each
due date of the principal, premium, or any payment of interest, if any, with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that such Paying Agent, shall hold in trust for the benefit
of Holders or the Trustee all money held by such Paying Agent for the payment
of principal, premium or interest with respect to the Notes, shall notify the
Trustee of any default by the Company in making any such payment and at any
time during the continuance of any such default, upon the written request of
the Trustee, shall forthwith pay to the Trustee all sums held in trust by
such Paying Agent.
The Company at any time may require a Paying Agent to pay all money held
by it to the Trustee and to account for any funds disbursed by such Paying
Agent. Upon complying with this Section 2.04, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
SECTION 2.05. GLOBAL NOTES. (a) So long as a Global Note is registered
in the name of the Depositary or its nominee, members of, or participants in,
the Depositary ("Agent Members") shall have no rights under this Indenture
with respect to the Global Note held on their behalf by the Depositary or the
Trustee as its custodian, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner
of such Global Note for
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all purposes. Notwithstanding the foregoing, nothing herein shall (i)
prevent the Company, the Trustee or any agent of the Company or the Trustee,
from giving effect to any written certification, proxy or other authorization
furnished by the Depositary or (ii) impair, as between the Depositary and its
Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of Notes.
(b) The Holder of a Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in such Global Note through Agent Members, to take any action which
a Holder of Notes is entitled to take under this Indenture or the Notes.
(c) Whenever, as a result of an optional redemption of Notes by the
Company, a Change of Control Offer, an Asset Sale Offer or an exchange
pursuant to the second sentence of Section 2.06(a) hereof, a Global Note is
redeemed, repurchased or exchanged in part, such Global Note shall be
surrendered by the Holder thereof to the Trustee who shall cause an
adjustment to be made to Schedule A thereof so that the principal amount of
such Global Note will be equal to the portion of such Global Note not
redeemed, repurchased or exchanged and shall thereafter return such Global
Note to such Holder, provided that any such Global Note shall be in a
principal amount of $1,000 or an integral multiple thereof.
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) The Global Note shall be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it
is unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange
Act is not able to be appointed by the Company within 90 calendar days or (b)
the Depositary is at any time unwilling or unable to continue as Depositary
and a successor to the Depositary is not able to be appointed by the Company
within 90 calendar days. If an Event of Default occurs and is continuing,
the Company shall, at the request of the Holder thereof, exchange all or part
of the Global Note for one or more Certificated Notes; PROVIDED that the
principal amount of each of such Certificated Notes and such Global Note,
after such exchange, shall be $1,000 or an integral multiple thereof. In
addition, the Holder of a beneficial interest in the Global Note may at any
time exchange such interest for a Certificated Note in a principal amount of
$1,000 or an integral multiple thereof. Whenever a Global Note is exchanged
as a whole for one or more Certificated Notes, such Global Note shall be
surrendered by the Holder thereof to the Trustee for cancellation. Whenever
a Global Note is exchanged in part for one or more Certificated Notes
pursuant to this Section 2.06(a), it shall be surrendered by the Holder
thereof to the Trustee and the Trustee shall make the appropriate notations
thereon pursuant to Section 2.05(c) hereof. All Certificated Notes issued in
exchange for a Global Note or any portion thereof shall be registered in such
names, and delivered, as the Depositary shall instruct the Trustee.
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(b) A Holder may transfer a Note only upon the surrender of such Note
for registration of transfer. No such transfer shall be effected until, and
the transferee shall succeed to the rights of a Holder only upon, final
acceptance and registration of the transfer in the Security Register by the
Registrar. When Notes are presented to the Registrar with a request to register
the transfer of, or to exchange, such Notes, the Registrar shall register the
transfer or make such exchange as requested if its requirements for such
transactions and any applicable requirements hereunder are satisfied. To permit
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Certificated Notes at the Registrar's request.
(c) The Company shall not be required to make and the Registrar need
not register transfers or exchanges of Certificated Notes (i) selected for
redemption (except, in the case of Certificated Notes to be redeemed in part,
the portion thereof not to be redeemed) and (ii) for a period of 15 calendar
days before a selection of Notes to be redeemed.
(d) No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment by Holders of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer of Notes.
(e) All Notes issued upon any registration of transfer or exchange
pursuant to the terms of this Indenture will evidence the same debt and will
be entitled to the same benefits under this Indenture as the Notes
surrendered for such registration of transfer or exchange.
(f) Any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form. Transfers of a
Global Note shall be limited to transfers in whole and not in part, to the
Depositary, its successors, and their respective nominees. Interests of
beneficial owners in a Global Note shall be transferred in accordance with
the rules and procedures of the Depositary (or its successors).
SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered
to the Trustee, the Company shall execute and upon its written request the
Trustee shall authenticate and make available for delivery, in exchange for
any such mutilated Note, a new Note containing identical provisions and of
like principal amount, bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Note and (ii)
such security or indemnity as may be required by them to save either of them
and any agent of each of them harmless, then, in the absence of notice to the
Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and make available for delivery, in lieu of any such destroyed,
lost or stolen Note, a new Note containing identical provisions and of like
principal amount, bearing a number not contemporaneously outstanding.
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In case any such mutilated, destroyed, lost or stolen Note has become or
is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.07, the Company
may require the payment by the Holder of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Note issued pursuant to this Section 2.07 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any
and all other Notes duly issued hereunder.
The provisions of this Section 2.07 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.08. OUTSTANDING NOTES. Notes outstanding at any time are all
Notes authenticated by the Trustee except for those canceled by it, those
delivered to it for cancellation, those paid pursuant to Section 2.07 and
those described in this Section 2.08 as not outstanding. A Note does not
cease to be outstanding because the Company or an Affiliate of the Company
holds such Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or Maturity date money sufficient to pay
all principal, premium, if any, and interest payable on that date with
respect to the Notes (or portions thereof) to be redeemed or maturing, as the
case may be, then on and after that date such Notes (or such portions
thereof) shall cease to be outstanding and interest on them shall cease to
accrue.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent or any amendment,
modification or other change to this Indenture, Notes held or beneficially
owned by the Company or a Subsidiary or Unrestricted Subsidiary of the
Company or by an Affiliate of the Company or of a Subsidiary or Unrestricted
Subsidiary of the Company or by agents of any of the foregoing shall be
disregarded, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent or any
amendment, modification or other change to this Indenture, only Notes which a
Trust Officer actually knows are so owned shall be so disregarded. Notes so
owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee such
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pledgee's right so to act with respect to the Notes and that the pledgee is
not the Company or an Affiliate of the Company or any of their agents.
SECTION 2.09. TEMPORARY NOTES. Pending the preparation of definitive
Notes, the Company may execute, and the Trustee shall authenticate, temporary
notes ("Temporary Notes") which are printed, lithographed, or otherwise
produced, substantially of the tenor of the definitive Notes in lieu of which
they are issued and with such appropriate insertions, omissions,
substitutions and other variations.
If Temporary Notes are issued, the Company shall cause definitive Notes
to be prepared without unreasonable delay. After the preparation of
definitive Notes, the Temporary Notes shall be exchangeable for definitive
Notes upon surrender of the Temporary Notes to the Trustee, without charge to
the Holder. Until so exchanged, Temporary Notes will evidence the same debt
and will be entitled to the same benefits under this Indenture as the
definitive Notes in lieu of which they have been issued.
SECTION 2.10. CANCELLATION. The Company at any time may deliver Notes
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall return such canceled Notes to the Company. The Company
may not issue new Notes to replace Notes it has redeemed or paid or that have
been delivered to the Trustee for cancellation.
SECTION 2.11. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest
on any Note which is payable, and is punctually paid or duly provided for, on
any Interest Payment Date shall be paid to the Person in whose name such Note
is registered at the close of business on the Record Date for such interest
payment, which shall be the ____________ __, or ____________ __ (whether or not
a Business Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder on
the relevant Record Date, and, except as hereinafter provided, such Defaulted
Interest, and any interest payable on such Defaulted Interest, may be paid by
the Company, at its election, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, to the Persons in
whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on the
Notes and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed
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payment, such money when deposited to be held in trust for the benefit of
the Persons entitled to such Defaulted Interest as provided in this Clause.
Thereupon the Trustee shall fix a Special Record Date for the payment of
such Defaulted Interest which shall be not more than 15 calendar days and
not less than 10 calendar days prior to the date of the proposed payment
and not less than 10 calendar days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the expense of
the Company, shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be sent, first class mail,
postage prepaid, to each Holder at such Holder's address as it appears in
the Security Register, not less than 10 calendar days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the Persons in whose names the Notes
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.11, each Note
delivered under this Indenture upon registration of transfer of, or in exchange
for, or in lieu of, any other Note, shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
SECTION 2.12. AUTHORIZED DENOMINATIONS. The Notes shall be issuable in
denominations of $1,000 and any integral multiple thereof.
SECTION 2.13. COMPUTATION OF INTEREST. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months.
SECTION 2.14. PERSONS DEEMED OWNERS. Prior to the due presentation for
registration of transfer of any Note, the Company, the Trustee, the Paying
Agent, the Registrar or any co-registrar may deem and treat the person in
whose name such Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of, premium, if any, and interest
on such Note and for all other purposes whatsoever, whether or not such Note
is overdue, and none of the Company, the Trustee, the Paying Agent, the
Registrar or any co-Registrar shall be affected by notice to the contrary.
SECTION 2.15. CUSIP NUMBERS. The Company, in issuing the Notes, may
use a "CUSIP" number for each series of Notes and, if so, the Trustee shall
use the relevant CUSIP number in any notices to Holders as a convenience to
such Holders; provided that any such notice may state that no
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representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes and that reliance may be placed only on
the other identification numbers printed on the Notes. The Company shall
promptly notify the Trustee of any change in any CUSIP number used.
ARTICLE III
REDEMPTION
SECTION 3.01. NOTICE TO TRUSTEE. If the Company elects to redeem Notes
pursuant to paragraph five of the Notes, it shall notify the Trustee in
writing of the Redemption Date and the principal amount of Notes to be
redeemed. The Company shall give each such notice to the Trustee at least 30
calendar days prior to the Redemption Date unless the Trustee consents to a
shorter period. Such notice shall be accompanied by an Officers' Certificate
and an Opinion of Counsel from the Company to the effect that such redemption
will comply with any conditions to such redemption set forth herein and in
the Notes.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all the
Notes are to be redeemed at any time, the Trustee shall select the Notes to
be redeemed on a pro rata basis, provided that the Trustee may select for
redemption in part only Notes in denominations larger than $1,000. In
selecting Notes to be redeemed pursuant to this Section 3.02, the Trustee
shall make such adjustments, reallocations and eliminations as it shall deem
proper so that the principal amount of each Note to be redeemed shall be
$1,000 or an integral multiple thereof, by increasing, decreasing or
eliminating any amount less than $1,000 which would be allocable to any
Holder. If the Notes to be redeemed are Certificated Notes, the Certificated
Notes to be redeemed shall be selected by the Trustee by prorating, as nearly
as may be, the principal amount of Certificated Notes to be redeemed among
the Holders of Certificated Notes registered in their respective names.
Provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption. The Trustee shall notify
the Company promptly of the Notes or portions of Notes to be redeemed.
SECTION 3.03. NOTICE OF REDEMPTION. At least 30 calendar days but not
more than 60 calendar days before a Redemption Date, the Company shall send a
notice of redemption, first class mail, postage prepaid, to Holders of Notes
to be redeemed at the addresses of such Holders as they appear in the Security
Register.
The notice shall identify the Notes to be redeemed (including CUSIP number)
and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
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(d) that the Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(e) if any Global Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, the Global Note, with a notation on Schedule A thereof adjusting the
principal amount thereof to be equal to the unredeemed portion, will be
returned to the Holder thereof;
(f) if any Certificated Note is being redeemed in part, the portion
of the principal amount of such Note to be redeemed and that, after the
Redemption Date, a new Certificated Note or Certificated Notes in principal
amount equal to the unredeemed portion will be issued;
(g) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
(h) that, unless the Company defaults in making the redemption
payment, interest on the Notes (or portions thereof) called for redemption
shall cease and such Notes (or portions thereof) shall cease to accrue
interest on and after the Redemption Date;
(i) the paragraph of the Notes pursuant to which the Notes are being
called for redemption; and
(j) any other information necessary to enable Holders to comply with
the notice of redemption.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section 3.03
in a timely manner.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, Notes called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price stated in such notice. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption
Price stated in such notice. Failure to give notice or any defect in the notice
to any Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 10:00 a.m.,
New York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed on that date other than Notes or portions of Notes called for
redemption on such date which have been delivered by the Company to the
Trustee for cancellation.
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So long as the Company complies with the preceding paragraph and the
other provisions of this Article III, interest on the Notes or portions
thereof to be redeemed on the applicable Redemption Date shall cease to
accrue from and after such date and such Notes or portions thereof shall be
deemed not to be entitled to any benefit under this Indenture except to
receive payment of the Redemption Price on the Redemption Date. If any Note
called for redemption shall not be so paid upon surrender for redemption,
then, from the Redemption Date until such Redemption Price is paid, interest
shall be paid on the unpaid principal and premium and, to the extent permitted
by law, on any accrued but unpaid interest thereon, in each case at the rate
prescribed therefor by such Notes.
SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender and cancellation
of a Certificated Note that is redeemed in part, the Company shall issue and
the Trustee shall authenticate and make available for delivery to the
surrendering Holder (at the Company's expense) a new Certificated Note equal
in principal amount to the unredeemed portion of the Certificated Note
surrendered and canceled, PROVIDED that each such Certificated Note shall be
in a principal amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is redeemed in part, the Paying
Agent shall forward such Global Note to the Trustee who shall make a notation
on Schedule A thereof to reduce the principal amount of such Global Note to
an amount equal to the unredeemed portion of such Global Note, as provided in
Section 2.05(c) hereof.
ARTICLE IV
COVENANTS
SECTION 4.01. PAYMENT OF NOTES. The Company shall promptly pay the
principal of, premium, if any, and interest on, the Notes on the dates and in
the manner provided in the Notes and in this Indenture. Principal, premium
and interest shall be considered paid on the date due if, on such date, the
Trustee or the Paying Agent holds in accordance with this Indenture money
sufficient to pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such overdue amount is due at its Stated Maturity, as a result of the Company's
obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 hereof, or
otherwise.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or
agency where Notes may be presented or surrendered for payment, where Notes
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Company in respect of the Notes and this Indenture
may be served, which office shall be initially the office of State Street
Bank and Trust Company, National Association, 61 Broadway, New York, New York
10006, Concourse Level, Corporate
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Trust Window. The Company shall give prompt written notice to the Trustee of
any change in the location of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee its agent
to receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes
may be presented or surrendered for any or all of such purposes, and may from
time to time rescind such designations; provided that no such designation or
rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in The City of New York, for such purposes. The
Company shall give prompt written notice to the Trustee of any such
designation and any change in the location of any such other office or agency.
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST. If the
Company, any Subsidiary of the Company or any of their respective Affiliates
shall at any time act as Paying Agent with respect to the Notes, such Paying
Agent shall, on or before each due date of the principal of (and premium, if
any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money sufficient to pay the principal
(and premium, if any) or interest so becoming due until such money shall be
paid to such Persons or otherwise disposed of as herein provided, and shall
promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect
to the Notes, it shall, prior to or on each due date of the principal of (and
premium, if any) or interest on any of the Notes, deposit with a Paying Agent
a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest and (unless such Paying Agent
is the Trustee) the Paying Agent shall promptly notify the Trustee of the
Company's action or failure so to act.
SECTION 4.04. CORPORATE EXISTENCE. Subject to the provisions of
Article V hereof, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory) and franchises of the Company and
each of its Subsidiaries; PROVIDED that the Company and any such Subsidiary
shall not be required to preserve the corporate existence of any such
Subsidiary or any such right or franchise if the Board of Directors of the
Company shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and that the loss thereof is
not disadvantageous in any material respect to the Holders of Notes.
SECTION 4.05. MAINTENANCE OF PROPERTY. The Company shall cause all
Property used or useful in the conduct of its business or the business of any
of its Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and shall cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
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thereof, all as, in the judgment of the Company, may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided that nothing in this Section 4.05 shall prevent
the Company from discontinuing the operation or maintenance of any of such
Property if such discontinuance is, in the judgment of the Company, desirable in
the conduct of its business or the business of any of its Subsidiaries and not
disadvantageous in any material respect to the Holders of Notes.
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon the Company or any of its Subsidiaries or upon the income,
profits or Property of the Company or any of its Subsidiaries and (b) all
lawful claims for labor, materials and supplies which, if unpaid, might by
law become a Lien upon the Property of the Company or any of its Subsidiaries;
PROVIDED that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings upon stay of execution or the enforcement thereof and for which
adequate reserves in accordance with GAAP or other appropriate provision has
been made.
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF
CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to purchase such Holder's
Notes, in whole or in part, in a principal amount that is an integral multiple
of $1,000, pursuant to the offer described in Section 4.07(b) hereof (the
"Change of Control Offer") at a purchase price (the "Change of Control Purchase
Price") in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase (the "Change of
Control Payment Date").
(b) Within 30 calendar days after the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send
to each Holder by first class mail, postage prepaid, a notice prepared by the
Company describing the transaction or transactions that constitute the Change
of Control and stating:
(i) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to this Section 4.07, and that all Notes that
are timely tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the Change of Control
Payment Date, which date shall be a Business Day no earlier than 30
calendar days nor later than 60 calendar days subsequent to the date such
notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrue interest;
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(iv) that, unless the Company defaults in the payment of the Change
of Control Purchase Price with respect thereto, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest from and after the Change of Control Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to
surrender such Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to the Paying Agent at
the address specified in the notice, prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date, a
facsimile transmission or letter, setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement that
such Holder is withdrawing such Holder's election to have such Notes or
portions thereof purchased pursuant to the Change of Control Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Change of Control Offer must specify the principal amount that is being
tendered for purchase, which principal amount must be $1,000 or an integral
multiple thereof;
(viii) if Certificated Notes have been issued pursuant to Section
2.06, that any Holder of Certificated Notes whose Certificated Notes are
being purchased only in part will be issued new Certificated Notes equal
in principal amount to the unpurchased portion of the Certificated Note or
Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a Global Note
that is being purchased in part, such Global Note with a notation on
Schedule A thereof adjusting the principal amount thereof to be equal
to the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.07.
(c) On the Change of Control Payment Date, the Company shall (1)
accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) irrevocably deposit with the Paying
Agent, by 10:00 a.m., New York City time, on such date, in immediately
available funds, an amount equal to the Change of Control Purchase Price in
respect of all Notes or portions thereof so accepted and (3) deliver or cause
to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Company. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes
or portions thereof so accepted for
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payment the Change of Control Purchase Price for such Notes or portions
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control
Payment Date. For purposes of this Section 4.07, the Trustee shall act as
the Paying Agent.
(d) Upon surrender and cancellation of a Certificated Note that is
purchased in part pursuant to the Change of Control Offer, the Company shall
promptly issue and the Trustee shall authenticate and deliver to the
surrendering Holder of such Certificated Note a new Certificated Note equal
in principal amount to the unpurchased portion of such surrendered
Certificated Note; provided that each such new Certificated Note shall be in
a principal amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to a
Change of Control Offer, the Paying Agent shall forward such Global Note to
the Trustee who shall make a notation on Schedule A thereof to reduce the
principal amount of such Global Note to an amount equal to the unpurchased
portion of such Global Note, as provided in Section 2.05(c) hereof.
(e) The Company shall comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
purchase of Notes pursuant to a Change of Control Offer.
(f) Prior to complying with the provisions of this Section 4.07, but in
any event within 30 days following a Change of Control, the Company shall
either repay all outstanding Senior Indebtedness or obtain the requisite
consents, if any, under all agreements governing outstanding Senior
Indebtedness to permit the repurchase of Notes required by this Section 4.07.
SECTION 4.08. LIMITATION ON ASSET SALES. (a) The Company shall not, and
shall not permit any of its Subsidiaries, directly or indirectly, to, engage
in an Asset Sale unless:
(i) the Company (or such Subsidiary) receives consideration at the
time of such Asset Sale at least equal to the fair market value, and in the
case of a lease of assets under which the Company or any of its
Subsidiaries is the lessor, a lease providing for rent and other conditions
which are no less favorable to the Company (or such Subsidiary) in any
material respect than the then prevailing market conditions (evidenced in
each case by a resolution of the Board of Directors of such Person set
forth in an Officers' Certificate of such Person delivered to the Trustee)
of the assets sold or otherwise disposed of, and
(ii) at least 85% (100% in the case of such lease payments) of the
consideration therefor received by the Company or such Subsidiary is in the
form of cash or Cash Equivalents or properties used in the Oil and Gas
Business of the Company and its Subsidiaries.
(b) The Company may apply Net Proceeds of an Asset Sale, at its option,
(a) to permanently reduce Senior Indebtedness other than Senior Revolving
Indebtedness, (b) to permanently reduce Senior Revolving Indebtedness (and to
correspondingly reduce commitments
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with respect thereto), or (c) to invest in properties and assets that will be
used in the Oil and Gas Business of the Company and its Subsidiaries. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Senior Revolving Indebtedness or otherwise invest such Net Proceeds in
any manner that is not prohibited by this Indenture.
Any Net Proceeds from Asset Sales that are not applied within 270 days
after the consummation of an Asset Sale as provided in the preceding paragraph
will be deemed to constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $5.0 million,
the Company will be required to make an offer to all Holders of Notes, as
described in Section 4.08(d) hereof (an "Asset Sale Offer"), to purchase from
all Holders, on a pro rata basis, Notes in an aggregate principal amount equal
to the maximum principal amount of Notes that may be purchased out of the
then existing Excess Proceeds, at a purchase price (the "Asset Sale Purchase
Price") in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase.
(d) Within 30 calendar days after the date the amount of Excess Proceeds
exceeds $5.0 million, the Company, or the Trustee at the request and expense of
the Company, shall send to each Holder by first class mail, postage prepaid, a
notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this Section
4.08, and that are Notes that are timely tendered will be accepted for
payment, subject to proration in the event the amount of Excess Proceeds is
less than the aggregate Asset Sale Purchase Price of all Notes timely
tendered pursuant to the Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds
that are available to be applied to purchase tendered Notes, and the date
Notes are to be purchased pursuant to the Asset Sale Offer (the "Asset
Sale Payment Date"), which date shall be a Business Day no earlier than
30 calendar days nor later than 60 calendar days subsequent to the date
such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted
for payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Asset Sale Offer shall cease to
accrue interest from and after the Asset Sale Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to the Asset Sale Offer will be required to surrender
such Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of such Notes completed, to the Paying
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Agent at the address specified in the notice, prior to the close of
business on the third Business Day preceding the Asset Sale Payment
Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Asset Sale Payment Date, a facsimile
transmission or letter, setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing such Holder's election to have such Notes or portions thereof
purchased pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Asset Sale Offer must specify the principal amount that is being tendered
for purchase, which principal amount must be $1,000 or an integral multiple
thereof;
(viii) if Certificated Notes have been issued pursuant to Section
2.06, that any Holder of Certificated Notes whose Certificated Notes are
being purchased only in part will be issued new Certificated Notes equal
in principal amount to the unpurchased portion of the Certificated Note or
Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a Global Note
that is being purchased in part, such Global Note with a notation on
Schedule A thereof adjusting the principal amount thereof to be equal to
the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.08.
(e) If the aggregate principal amount of the Notes surrendered by
Holders exceeds the amount of Excess Proceeds as indicated in the notice
required by Section 4.08(d) hereof, the Trustee shall select the Notes to be
purchased on a PRO RATA basis based on the principal amount of the Notes
tendered, with such adjustments as may be deemed appropriate by the Trustee,
so that only Notes in denominations of $1,000 or integral multiples thereof
shall be purchased.
(f) On the Asset Sale Payment Date, the Company shall (i) accept for
payment any Notes or portions thereof properly tendered and selected for
purchase pursuant to the Asset Sale Offer and Section 4.08(e) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time,
on such date, in immediately available funds, an amount equal to the Asset
Sale Purchase Price in respect of all Notes or portions thereof so accepted;
and (iii) deliver, or cause to be delivered, to the Trustee the Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof tendered to the Company and accepted for payment. The Paying Agent
shall promptly send by first class mail, postage prepaid, to each Holder of
Notes or portions thereof so accepted for payment the Asset Sale Purchase
Price for such Notes or portions thereof. The Company shall
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publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Asset Sale Payment Date. For purposes of this Section
4.08, the Trustee shall act as the Paying Agent.
(g) Upon surrender and cancellation of a Certificated Note that is
purchased in part, the Company shall promptly issue and the Trustee shall
authenticate and deliver to the surrendering Holder of such Certificated Note
a new Certificated Note equal in principal amount to the unpurchased portion
of such surrendered Certificated Note; PROVIDED that each such new
Certificated Note shall be in a principal amount of $1,000 or an integral
multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to an
Asset Sale Offer, the Paying Agent shall forward such Global Note to the
Trustee who shall make a notation on Schedule A thereof to reduce the
principal amount of such Global Note to an amount equal to the unpurchased
portion of such Global Note, as provided in Section 2.05(c) hereof.
(h) Upon completion of an Asset Sale Offer (including payment of the
Asset Sale Purchase Price for accepted Notes), any surplus Excess Proceeds
that were the subject of such offer shall cease to be Excess Proceeds, and
the Company may then use such amounts for general corporate purposes.
(i) The Company shall comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
purchase of Notes pursuant to an Asset Sale Offer.
SECTION 4.9. OWNERSHIP OF CAPITAL STOCK. The Company shall not permit
any Person (other than the Company or any Wholly Owned Subsidiary of the
Company) to own any Capital Stock of any Subsidiary of the Company or any
lien or security interest therein, and shall not permit any Subsidiary of the
Company to issue Capital Stock (except to the Company or to a Wholly Owned
Subsidiary of the Company) or create, incur, assume or suffer to exist any
lien or security interest therein, in each case except (a) directors'
qualifying shares, (b) Capital Stock issued prior to the time such Person
becomes a Subsidiary of the Company, (c) if such Subsidiary merges with and
into another Subsidiary, (d) if another Subsidiary merges with and into such
Subsidiary, (e) if such Subsidiary ceases to be a Subsidiary (as a result of
the sale of 100% of the shares of such Subsidiary, the Net Proceeds from
which are applied in accordance with Section 4.08 hereof), or (f) Capital
Stock of a Subsidiary organized in a foreign jurisdiction required to be
issued to, or owned by, the government of such foreign jurisdiction or
individual or corporate citizens of such foreign jurisdiction in order for
such Subsidiary to transact business in such foreign jurisdiction.
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SECTION 4.10. UNRESTRICTED SUBSIDIARIES. The Board of Directors of the
Company may designate any of its Subsidiaries as Unrestricted Subsidiaries.
A Subsidiary may only be so designated if (i) immediately after giving effect
to such designation no Default or Event of Default exists, (ii) the Company
would, at the time of such designation and after giving pro forma effect
thereto as if such designation had occurred at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Consolidated Interest Coverage
Ratio and the Adjusted Consolidated Net Tangible Assets to Consolidated
Indebtedness Ratio tests set forth in Section 4.12(a) hereof, and (iii) after
the date of this Indenture and prior to such designation, no assets of the
Company or of any Subsidiary of the Company (including, without limitation,
Capital Stock of any such Subsidiary) shall have been transferred, directly
or indirectly, to any Unrestricted Subsidiary or any of its Subsidiaries,
other than assets transferred in the ordinary course of business and on terms
that are no less favorable to the Company or the relevant Subsidiary than
those that would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person. Any such designation by
the Board of Directors of the Company shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution of the
Company giving effect to such designation and an Officers' Certificate of the
Company certifying that such designation complied with the foregoing
conditions.
Any Subsidiary of the Company shall continue to be an Unrestricted
Subsidiary only if it (a) has no Indebtedness other than Non-Recourse
Indebtedness; (b) is a Person with respect to which neither the Company nor
any of its Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of the Company or
any of its Subsidiaries. If, at any time, any Unrestricted Subsidiary fails
to meet the foregoing requirements, such Unrestricted Subsidiary shall
thereafter cease to be an Unrestricted Subsidiary for purposes of this
Indenture, such Unrestricted Subsidiary shall execute and deliver a
supplemental indenture pursuant to which such Person guarantees the payment
of the Notes on the same terms and conditions as the Subsidiary Guarantees by
the Subsidiary Guarantors and any Indebtedness of such Unrestricted
Subsidiary shall be deemed to be incurred by a Subsidiary of the Company as
of such date.
The Board of Directors of the Company may at any time designate any
Subsidiary, if previously designated as Unrestricted Subsidiaries, to be a
Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Subsidiary of the Company of any outstanding
Indebtedness of such Subsidiary and such designation shall only be permitted
if (i) such Indebtedness is permitted under the covenant described under
Section 4.12 hereof, (ii) no Default or Event of Default would be in
existence following such designation and (iii) such Subsidiary shall execute
and deliver a supplemental indenture pursuant to which such Person guarantees
the payment of the Notes on the same terms and conditions as the Subsidiary
Guarantees by the Subsidiary Guarantors.
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SECTION 4.11. RESTRICTED PAYMENTS. The Company shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any distribution on account of the Company's or any
of its Subsidiaries' Equity Interests, other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or distributions payable to the Company or any Wholly Owned
Subsidiary of the Company; (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company or any Subsidiary or
Unrestricted Subsidiary or other Affiliate of the Company (other than Equity
Interests of the Company, any Subsidiary or Unrestricted Subsidiary owned by
any Wholly Owned Subsidiary of the Company); (iii) make any principal payment
on, or purchase, redeem, defease or otherwise acquire or retire for value any
PARI PASSU Indebtedness prior to a scheduled mandatory sinking fund payment
date or maturity date, or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Interest Coverage Ratio and the Adjusted
Consolidated Net Tangible Assets to Consolidated Indebtedness Ratio
tests set forth under Section 4.12(a); and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Subsidiaries on or
after the date of this Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv) and (v) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of the Company and its Subsidiaries for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of this Indenture to the end of the Company's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company as capital contributions to the Company or from
the issue or sale after the date of this Indenture of Equity Interests
of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary or an Unrestricted
Subsidiary of the Company and other than Disqualified Stock or
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debt securities that have been converted into Disqualified Stock),
except for Capital Stock of the Company issued contemporaneously with
the issuance of the Notes.
The foregoing clauses (b) and (c), however, will not prohibit (i) the
payment of any dividend within 60 days after the date of declaration thereof,
if at said date of declaration such payment would have complied with the
provisions of this Indenture; (ii) the payment of any dividend on Equity
Interests of the Company (other than Disqualified Stock) payable solely in
shares of Equity Interests of the Company (other than Disqualified Stock);
(iii) any dividend or other distribution payable from a Subsidiary of the
Company to the Company or any Wholly Owned Subsidiary; (iv) the making of any
Restricted Investment in exchange for, or out of the proceeds of, the
substantially concurrent sale, issuance or exchange (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock); PROVIDED, that any net cash
proceeds that are utilized for any such Restricted Investment shall be
excluded from clause (c) of the preceding paragraph; (v) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company in exchange for, or out of the proceeds of, the substantially
concurrent sale, issuance or exchange (other than to a Subsidiary or any
Unrestricted Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); PROVIDED that any net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c) of the preceding
paragraph; and (vi) the defeasance, redemption or repurchase of any PARI
PASSU Indebtedness prior to a scheduled mandatory sinking fund payment date
or maturity date thereof with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale
(other than to a Subsidiary or any Unrestricted Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock) or the
purchase, redemption or acquisition by the Company of any PARI PASSU
Indebtedness prior to a scheduled mandatory sinking fund payment date or
maturity date thereof through the issuance in exchange thereof of Equity
Interests of the Company (other than Disqualified Stock); PROVIDED, that any
net cash proceeds that are utilized for any such defeasance, redemption or
repurchase, purchase or acquisition shall be excluded from clause (c) of the
preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the
fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) on the date of
the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate of the Company
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this Section 4.11 were computed,
which calculations may be based upon the Company's latest available financial
statements.
SECTION 4.12. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK. (a) The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired Indebtedness) and the Company shall not issue any
Disqualified Stock and shall not permit any of its Subsidiaries to issue any
shares of preferred stock; PROVIDED, HOWEVER, that the Company may incur
Indebtedness (including Acquired Indebtedness) and the Company may issue
shares of Disqualified Stock if: (i) the Consolidated Interest Coverage
Ratio for the Company's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date on which
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such additional Indebtedness is incurred or such Disqualified Stock is issued
would have been at least, during the period from the date of this Indenture
until the first anniversary thereof, 2.25 to 1, and thereafter, 2.50 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period; (ii) the Adjusted Consolidated Net Tangible
Assets would have been at least 150% of Consolidated Indebtedness, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom) and (iii) no Default or Event of Default shall have occurred and
be continuing or would occur as a consequence thereof; PROVIDED, that no
Guarantee may be incurred pursuant to this paragraph, unless the guaranteed
Indebtedness is incurred by the Company or a Subsidiary pursuant to this
paragraph.
(b) The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Facility (and the incurrence by Subsidiaries of Guarantees thereof) in
an aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Subsidiaries thereunder) not
to exceed $50 million, less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce the outstanding amount or the
commitments with respect to such Indebtedness pursuant to Section 4.08
hereof;
(ii) the incurrence by the Company of Indebtedness represented by
the Notes and of its Subsidiaries of Indebtedness represented by the
Subsidiary Guarantees;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or
refund, any Indebtedness described in Section 4.12(b)(ii) hereof;
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; PROVIDED that, in the case of Indebtedness of the Company,
such obligations shall be unsecured and subordinated in case of an event
of default in all respects to the Company's obligations pursuant to the
Notes; and PROVIDED, HOWEVER, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary of the Company and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either the Company or a Wholly Owned Subsidiary of the
Company shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(v) the incurrence by the Company or Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by this
Indenture to be incurred; PROVIDED that the notional amount
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of such Hedging Obligations does not exceed the principal amount of the
Indebtedness to which such Hedging Obligations relate;
(vi) the incurrence by the Company of Hedging Obligations under
commodity hedging and currency exchange agreements; PROVIDED that such
agreements were entered into in the ordinary course of business for the
purpose of limiting risks that arise in the ordinary course of business;
and
(vii) the incurrence by the Company and its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause
of this Section 4.12) in an aggregate principal amount at any time
outstanding not to exceed $10 million.
SECTION 4.13. LIENS. The Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens but only to the extent
securing obligations not constituting Indebtedness) on any of its assets, now
owned or hereafter acquired, securing any Indebtedness other than Senior
Indebtedness, unless the Notes are secured equally and ratably with such
other Indebtedness; PROVIDED that, if such Indebtedness is by its terms
expressly subordinate to the Notes, the Lien securing such subordinate or
junior Indebtedness shall be subordinate and junior to the Lien securing the
Notes with the same relative priority as such subordinated or junior
Indebtedness shall have with respect to the Notes.
SECTION 4.14. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any encumbrance or restriction on the ability of
any Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Subsidiaries on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits, or (b)
pay any indebtedness owed to the Company or any of its Subsidiaries, (ii)
make loans or advances to the Company or any of its Subsidiaries, (iii)
transfer any of its properties or assets to the Company or any of its
Subsidiaries, (iv) transfer any of its property or assets to the Company or
any of its Subsidiaries, (v) grant liens or security interests on the assets
in favor of the Holders of Notes, or (vi) guarantee the Notes or any renewals
or refinancings thereof, except for such encumbrances or restrictions
existing under or by reason of (A) the Credit Facility, this Indenture and
the Note, (B) applicable law, (C) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Subsidiaries as in effect at the time of such acquisition (except to the
extent such Acquired Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
PROVIDED that the Consolidated EBITDA of such Person is not taken into
account in determining whether such acquisition was permitted by the terms of
this Indenture, or (D) Permitted Refinancing Indebtedness, PROVIDED that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
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SECTION 4.15. LIMITATION ON LAYERING DEBT. The Company shall not
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment of the Notes.
SECTION 4.16. TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall not permit any of its Subsidiaries to, after the date of this
Indenture, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or make any payment to, or purchase any property or
assets from, or enter into or suffer to exist any transaction or series of
transactions, or make any agreement, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), other than Exempt Affiliate Transactions, unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company
or the relevant Subsidiary (as reasonably determined by the Company) than
those that would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction entered
into after the date of this Indenture involving aggregate consideration in
excess of $10 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved
by a majority of the disinterested members of the Board of Directors and (b)
with respect to any Affiliate Transaction involving aggregate consideration
in excess of $5.0 million, an opinion as to the fairness to the Company or
such Subsidiary of such Affiliate Transaction from a financial point of view
issued by an investment banking firm of national standing.
SECTION 4.17. REPORTS. Whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company shall furnish to the Holders of Notes, and file with the Trustee,
within 15 days after it is, or would have been, required to file such with
the Commission (i) all quarterly and annual financial information that is or
would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company is or were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii)
all current reports that are or would be required to be filed with the
Commission on Form 8-K if the Company is or were required to file such
reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company shall file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon written request.
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
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SECTION 4.18. WAIVER OF STAY, EXTENSION OR USURY LAWS. Each of the
Company and the Subsidiary Guarantors covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or forgive
the Company or such Subsidiary Guarantor from paying all or any portion of
the principal of or premium, if any, or interest on the Notes as contemplated
herein, wherever enacted, now or at any time hereafter in force, or that may
affect the covenants or the performance of this Indenture; and (to the extent
that it may lawfully do so) the Company or such Subsidiary Guarantor hereby
expressly waives all benefit or advantage of any such law and covenants that
it will not hinder, delay or impede the execution of any power herein granted
to the Trustee, but will suffer and permit the execution of every such power
as though no such law had been enacted.
SECTION 4.19. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT. (a) The Company shall deliver to the Trustee within 120 calendar
days after the end of each fiscal year of the Company ending after the date
hereof, an Officers' Certificate stating whether or not, to the best
knowledge of such officer, the Company has complied with all conditions and
covenants under this Indenture, and, if the Company shall be in Default,
specifying all such Defaults and the nature thereof of which such officer may
have knowledge.
For the purposes of this Section 4.19(a), compliance shall be determined
without regard to any period of grace or requirement of notice under this
Indenture.
(b) The Company shall deliver written notice to the Trustee immediately
upon any executive officer of the Company becoming aware of the occurrence of
any event which constitutes, or with the giving of notice or the lapse of
time or both would constitute, a Default or Event of Default, describing such
Default or Event of Default, its status and what action the Company is taking
or proposes to take with respect thereto.
(c) So long as not contrary to the then-current recommendations of the
American Instituted of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.17 hereof shall be accompanied by
a written statement of the Company's independent public accountants (who
shall be a firm of established national reputation) that in making the
examination necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that the Company
has violated any provisions of Article IV or Article V hereof or, if any such
violation has occurred, specifying the nature and period of existence
thereof, it being understood that such accountants shall not be liable
directly or indirectly to any Person for any failure to obtain knowledge of
any such violation.
SECTION 4.20. INVESTMENT COMPANY ACT. None of the Company or the
Subsidiaries or Unrestricted Subsidiaries of the Company shall become an
investment company subject to registration under the Investment Company Act
of 1940, as amended.
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SECTION 4.21. SALE AND LEASEBACK. The Company will not, and will not
permit any of its Subsidiaries to, enter into any Sale and Leaseback
Transaction unless (a) the Company or its Subsidiaries entering into such
Sale and Leaseback Transaction could have incurred the Indebtedness relating
to such Sale and Leaseback Transaction pursuant to Sections 4.12 and 4.13 and
(b) the Net Proceeds of such Sale and Leaseback Transaction are at least
equal to the fair market value of such property as determined by the Board of
Directors of the Company.
SECTION 4.22. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company shall execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
ARTICLE V
CONSOLIDATION, MERGER,
CONVEYANCE, LEASE OR TRANSFER
SECTION 5.1. MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company
shall not, and shall not permit any Subsidiary to, in a single transaction or
series of related transactions consolidate or merge with or into (other than
the consolidation or merger of a Wholly Owned Subsidiary of the Company with
another Wholly Owned Subsidiary of the Company or into the Company) (whether
or not the Company or such Subsidiary is the surviving corporation), or
directly and/or indirectly through its Subsidiaries sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its
properties or assets (determined on a consolidated basis for the Company and
its Subsidiaries taken as a whole) in one or more related transactions to,
another corporation, Person or entity unless (i) either (a) the Company, in
the case of a transaction involving the Company, or such Subsidiary, in the
case of a transaction involving a Subsidiary, is the surviving corporation or
(b) in the case of a transaction involving the Company, the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia and assumes all the obligations of the Company under the
Notes and this Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (ii) immediately after such
transaction no Default or Event of Default exists; and (iii) the Company or,
if other than the Company, the entity or Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Consolidated Interest Coverage
Ratio and the Adjusted Consolidated Net Tangible Assets to Consolidated
Indebtedness Ratio tests set forth in Section 4.12(a) hereof.
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In connection with any consolidation, merger, conveyance, lease or other
disposition contemplated by this Section 5.01, the Company shall deliver, or
cause to be delivered, to the Trustee, in form reasonably satisfactory to the
Trustee, an Officers' Certificate of the Company and an Opinion of Counsel of
the Company, each stating that such consolidation, merger, conveyance, lease
or disposition and any supplemental indenture in respect thereto comply with
this Section 5.01 and that all conditions precedent herein provided for
relating to such transaction have been complied with.
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation
with, or merger by the Company with and into, any other corporation, or any
sale, assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the Property of the Company and its Subsidiaries taken
as a whole in accordance with Section 5.01 hereof, the successor corporation
formed by such consolidation or into which the Company is merged, or the
Person to which such sale, conveyance, assignment, transfer, lease,
conveyance or other disposition is made, shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this
Indenture with the same effect as if such successor Person has been named as
the Company herein; and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes,
EXCEPT for the obligation to pay the principal of (and premium, if any) and
interest on the Notes.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT. "Event of Default," wherever used
herein with respect to the Notes, means any one of the following events
(whatever the reason for such event, and whether it shall be voluntary or
involuntary, or be effected by operation of law, pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) The Company or any Subsidiary Guarantor fails to make any
payment of interest on any Note when the same becomes due and payable
and such failure continues for a period of 30 calendar days, whether or
not such payment is prohibited by the provisions of Articles X or XI
hereof; or
(b) The Company or any Subsidiary Guarantor fails to make any
payment of the principal or of premium, if any, on any Note when the
same becomes due and payable whether upon maturity, redemption, required
repurchase or otherwise, whether or not such payment is prohibited by
the provisions of Articles X or XI hereof; or
(c) the Company or any Subsidiary fails to observe or perform any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to Section 4.07, 4.08, 4.09, 4.11 or 4.12
hereof or Article V hereof; or
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(d) the Company or any Subsidiary fails to comply with any of its
other agreements or covenants in, or provisions of, the Notes or this
Indenture and such failure continues for the period and after the notice
specified below; or
(e) a default occurs under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of
its Subsidiaries (or the payment of which is Guaranteed by the Company
or any of its Subsidiaries), whether such Indebtedness or Guarantee now
exists or shall be created after the date of this Indenture, which
default (i) is caused by a failure to pay principal of such Indebtedness
at final maturity thereof (a "Payment Default) or (ii) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of such Indebtedness, together with the
principal amount of any other Indebtedness as to which there has been a
Payment Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more; or
(f) a final judgment or final judgments for the payment of money
not fully covered by insurance are entered by a court or courts of
competent jurisdiction against the Company or any of its Subsidiaries
and such judgment or judgments remain undischarged for a period (during
which execution shall not be effectively stayed) of 60 days, PROVIDED
that the aggregate of all such undischarged judgments exceeds $1.0
million; or
(g) the entry by a court having jurisdiction in the premises of
(i) a decree or order for relief in respect of the Company or any
Subsidiary of the Company in an involuntary case or proceeding under
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state, or foreign bankruptcy, insolvency, or
other similar law or (ii) a decree or order adjudging the Company or any
Subsidiary of the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of, or in respect of, the Company or any
Subsidiary of the Company under United States bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency, or similar law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or any Subsidiary of the Company or of any
substantial part of the Property of the Company or any Subsidiary of the
Company, or ordering the winding-up or liquidation of the affairs of the
Company or any Subsidiary of the Company, and the continuance of any
such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 60 consecutive calendar days; or
(h) (i) the commencement by the Company or any Subsidiary of the
Company of a voluntary case or proceeding under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state, or foreign bankruptcy, insolvency or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent; or
(ii) the consent by the Company or any Subsidiary of the Company to the
entry of a decree or order for relief in respect of the Company or any
Subsidiary or Unrestricted Subsidiary of the Company
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in an involuntary case or proceeding under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state, or foreign bankruptcy, insolvency, or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
the Company or any Subsidiary of the Company; or (iii) the filing by the
Company or any Subsidiary of the Company of a petition or answer or
consent seeking reorganization or relief under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law; or (iv)
the consent by the Company or any Subsidiary of the Company to the
filing of such petition or to the appointment of or taking possession by
a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Subsidiary of the Company or of
any substantial part of the Property of the Company or any Subsidiary of
the Company, or the making by the Company or any Subsidiary of the
Company of an assignment for the benefit of creditors; or (v) the
admission by the Company or any Subsidiary of the Company in writing of
its inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Subsidiary of the
Company in furtherance of any such action; or
(i) any Subsidiary Guarantee or any provision thereof shall at any
time cease to be the legal, valid and binding obligation of the
Subsidiary Guarantor party thereto as represented in the Subsidiary
Guarantee, such that the Holders of the Notes could not reasonably be
expected to realize the material benefits intended to be provided by
such Subsidiary Guarantor under the Subsidiary Guarantee or any
Subsidiary Guarantor shall assert that the Subsidiary Guarantee is not a
legal, valid and binding obligation or shall purport to revoke its
obligations thereunder.
A Default under clause (d) is not an Event of Default until the Trustee
notifies the Company, or the Holders of at least 25% in principal amount of
the then outstanding Notes notify the Company and the Trustee, of the Default
and the Company does not cure the Default within 60 calendar days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default".
SECTION 6.2. ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 6. 01(g) or Section 6.01(h)) occurs and is
continuing, then and in every such case the Trustee by notice to the Company,
or the Holders of at least 25% in principal amount of the then outstanding
Notes by written notice to the Company and the Trustee may declare the unpaid
principal of and any accrued interest on all the Notes then outstanding to be
immediately due and payable. Upon such declaration the principal and
interest shall be due and payable immediately (together with any premium, if
applicable). If an Event of Default specified in Section 6.01(g) or Section
6.01(h) occurs, such an amount shall IPSO FACTO become and be immediately due
and payable without any declaration or other act on the part of the Trustee
or any Holder.
The Holders of a majority in principal amount of the then outstanding
Notes by written notice to the Trustee may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default (except nonpayment of principal,
interest or premium that have become due solely because of the acceleration)
have been cured or
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waived. No such recession shall affect any subsequent Default or impair any
right consequent thereon.
SECTION 6.3. OTHER REMEDIES. The Company covenants that if an Event of
Default specified in Section 6.01(a) or Section 6.01(b) occurs the Company
shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders, the whole amount then due and payable on the Notes for principal
(and premium, if any) and interest and, to the extent that payment of such
interest shall be legally enforceable, interest upon the overdue principal
(and premium, if any) and upon Defaulted Interest at the rate or rates
prescribed therefor in such Notes; and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel and all other amounts due to the
Trustee pursuant to Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the
same against the Company or any other obligor upon such Notes and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the Property of the Company or any other obligor upon such Notes, wherever
situated.
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce
any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 6.4. WAIVER OF PAST DEFAULTS. The Holders of not less than a
majority in principal amount of the outstanding Notes may, on behalf of the
Holders of all the Notes, waive any past Default and its consequences under
this Article VI, except Default (a) in the payment of the principal of (or
premium, if any) or interest on, any Note (except a payment default resulting
from an acceleration that has been rescinded), or (b) in respect of a
covenant or provision hereof which under Section 9.02 hereof cannot be
modified or amended without the consent of the Holder of each outstanding
Note affected. Any such waiver may (but need not) be given in connection
with a tender offer or exchange offer for the Notes.
SECTION 6.5. CONTROL BY MAJORITY. The Holders of not less than a
majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; PROVIDED that:
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(a) such direction shall not be in conflict with any rule of law
or with this Indenture or unduly prejudicial to the rights of other
Holders and would not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 6.6. LIMITATION ON SUITS. No Holder of Notes shall have any
right to institute any proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal amount of
the outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee security or
indemnity satisfactory to the Trustee in its reasonable discretion
against the costs, expenses and liabilities to be incurred in compliance
with such request;
(d) the Trustee for 30 calendar days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a
majority in principal amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by
availing of, any provision of this Indenture to affect, disturb or prejudice
the rights of any other Holders of Notes, or to obtain or to seek to obtain
priority or preference over any other of such Holders or to enforce any right
under this Indenture, except in the manner herein provided and for the equal
and ratable benefit of all Holders of Notes.
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment
of principal of (premium, if any) and interest on the Notes held by such
Holder, on or after the respective due dates expressed in the Notes or the
redemption dates or purchase dates provided for therein, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall
be absolute and unconditional and shall not be impaired or affected without
the consent of such Holder.
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SECTION 6.8. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company, any Subsidiary Guarantor or
any other obligor upon the Notes or the Property of the Company, any
Subsidiary Guarantor or of such other obligor or their creditors, the Trustee
(irrespective of whether the principal of such Notes shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company or any
Subsidiary Guarantor for the payment of overdue principal or interest) shall
be entitled and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and premium,
if any) and interest owing and unpaid in respect of the Notes, to file such
other papers or documents and to take such other actions, including
participating as a member or otherwise in any official committee of creditors
appointed in the matter, as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee pursuant to Section 7.07
hereof) and of the Holders allowed in such judicial proceeding, and (ii) to
collect and receive any moneys or other Property payable or deliverable on
any such claims and to distribute the same; and any receiver, assignee,
trustee, custodian, liquidator, sequestrator (or other similar official) in
any such proceeding is hereby authorized by each Holder to make such payments
to the Trustee, and in the event that the Trustee shall consent to the making
of such payments directly to the Holders, to pay to the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.07 hereof. Nothing contained herein shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf
of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any
such proceeding.
SECTION 6.9. PRIORITIES. Any money collected by the Trustee pursuant
to this Article VI shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal (premium, if any) or interest upon presentation of the
Notes and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
(a) FIRST: To the payment of all amounts due the Trustee under
Section 7.07 hereof;
(b) SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal (and premium, if any) and
interest, respectively; and
(c) THIRD: To the Company.
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The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.09. At least 15 calendar days before such
record date, the Company shall mail to each Holder and the Trustee a notice
that states such record date, the payment date and amount to be paid. The
Trustee may mail such notice in the name and at the expense of the Company.
SECTION 6.10. UNDERTAKING FOR COSTS. All parties to this Indenture
agree, and each Holder of any Note by such Holder's acceptance thereof shall
be deemed to have agreed, that any court may in its discretion require, in
any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Trustee for any action taken, suffered or omitted by
it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to any suit instituted by
the Trustee, to any suit instituted by any Holder, or group of Holders,
holding in the aggregate more than 10 percent in principal amount of the
outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or
interest on any Note on or after its Stated Maturity.
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS. The Company and the
Subsidiary Guarantors (to the extent it or they may lawfully do so) shall not
at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law wherever enacted, now
or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company and the Subsidiary Guarantors
(to the extent that it or they may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or
impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF THE
NOTES. All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of
the Notes or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own
name, as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes.
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or
any Holder of Notes has instituted any proceeding to enforce any right or
remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the Subsidiary
Guarantors, the Trustee and the Holders shall, subject to any determination
in such proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Trustee
and the Holders shall continue as though no such proceeding had been
instituted.
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SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided in Section 2.07 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any
other appropriate right or remedy.
SECTION 6.15. DELAY OR OMISSION NOT WAIVER. No delay or omission of
the Trustee or of any Holder of any Note to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article VI or by law to the Trustee or
to the Holders may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE VII
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and shall use the same degree of care and
skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default: (i) the
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and (ii)
in the absence of bad faith on its part, the Trustee may conclusively rely,
as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; PROVIDED that in the case
of any such certificates or opinions that by any provision of this Indenture
are specifically required to be furnished to the Trustee, the Trustee shall
examine such certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, PROVIDED that: (i) this paragraph (c) shall not limit the effect
of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable
for any error of judgment made in good faith by a Trust Officer unless it is
proved that the Trustee was negligent in ascertaining the pertinent facts;
and (iii) the Trustee shall not be liable with respect to any action it takes
or omits to take in good faith in accordance with a direction received by it
pursuant to Section 6.05 hereof.
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(d) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company.
(e) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk of liability
is not reasonably assured to it.
(g) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article VII and to the provisions of the
Trust Indenture Act.
SECTION 7.2. RIGHTS OF TRUSTEE. (a) The Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper Person. Except as provided in Section 7.01(b) hereof, the Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
any Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any such agent; PROVIDED that such agent was
appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; PROVIDED that the Trustee's conduct does not constitute willful
misconduct or gross negligence.
(e) The Trustee shall not be charged with knowledge of any Default or
Event of Default under Sections 6.01(c), 6.01(d), 6.01(e) or 6.01(f) hereof,
of the identity of any Subsidiary or of the existence of any Change of
Control or Asset Sale unless either (i) a Trust Officer shall have actual
knowledge thereof, or (ii) the Trustee shall have received notice thereof in
accordance with Section 12.02 hereof from the Company or any Holder of Notes.
(f) The Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction,
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consent, order, bond, debenture or other paper or document, but the Trustee,
in its discretion may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine
the books, records and premises of the Company, personally or by agent or
attorney.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, any Paying
Agent or Registrar, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee, Paying
Agent or Registrar hereunder, as the case may be; PROVIDED that the Trustee
must in any event comply with Section 7.10 and Section 7.11 hereof.
SECTION 7.4. TRUSTEE'S DISCLAIMER. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's
use of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company in this Indenture, including the recitals contained
herein, or in any document issued in connection with the sale of the Notes or
in the Notes other than the Trustee's certificate of authentication.
SECTION 7.5. NOTICE OF DEFAULTS. Within 90 calendar days after the
occurrence of any Default hereunder with respect to the Notes, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Security Register, notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived, PROVIDED that, except in
the case of a Default in the payment of the principal of (or premium, if any)
or interest on any Note, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Trust Officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders.
SECTION 7.6. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO
HOLDERS. (a) The Company shall furnish or cause to be furnished to the
Trustee:
(i) semiannually, not less than 10 calendar days prior to each
Interest Payment Date, a list, in such form as the Trustee may
reasonably require, of the names and addresses of the Holders as of the
Record Date immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in writing,
within 30 calendar days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 calendar days prior to the time such list is furnished;
PROVIDED, HOWEVER, that if and so long as the Trustee shall be the Registrar
for the Notes, no such list need be furnished with respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in
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Section 7.06(a) hereof and the names and addresses of Holders received by the
Trustee in its capacity as Registrar, if so acting. The Trustee may destroy
any list furnished to it as provided in Section 7.06(a) hereof upon receipt
of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
(d) Each Holder of Notes, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee
shall be held accountable by reason of the disclosure of any such information
as to the names and addresses of the Holders in accordance with this Section
7.06, regardless of the source from which such information was derived, and
that the Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under this Section 7.06.
(e) Within 60 calendar days after May 15 of each year commencing
with the year 1997, the Trustee shall transmit by mail to all Holders of
Notes, a brief report dated as of such May 15 if and to the extent
required under Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of the
Trust Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof shall, at
the time of its transmission to Holders, be filed by the Trustee with each
stock exchange, if any, upon which the Notes are then listed, with the
Commission and also with the Company. The Company shall promptly notify the
Trustee of any stock exchange upon which the Notes are listed.
SECTION 7.7. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time such compensation for its services as the Company
and the Trustee shall from time to time agree. The Company shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred
or made by it, including costs of collection, in addition to the compensation
for its services. Such expenses shall include the reasonable compensation
and expenses, disbursements and advances of the Trustee's agents and counsel.
The Trustee's compensation shall not be limited by any law on compensation
of a trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless
against, any and all loss, liability, damage, claim or expense (including
reasonable attorneys' fees and expenses) arising out of or incurred by it in
connection with the acceptance or administration of the trust created by this
Indenture and the performance of its duties hereunder, except as set forth in
the next paragraph. The Trustee shall notify the Company promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify
the Company shall not relieve the Company of its obligations hereunder. The
Company shall defend any such claim and the Trustee shall cooperate in the
defense of such claim. The Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need
not pay for any settlement made without its consent, which consent shall not
be unreasonably withheld.
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The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
willful misconduct, gross negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07,
the Trustee shall have a Lien prior to the Notes on all money or property
held or collected by the Trustee other than money or property held in trust
to pay principal of, premium, if any, and interest on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07
shall survive the resignation or removal of the Trustee and discharge of this
Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.01(g) or Section 6.01(h)
hereof, the expenses are intended to constitute expenses of administration
under bankruptcy law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. (a) No resignation or
removal of the Trustee and no appointment of a successor Trustee pursuant to
this Article VII shall become effective until the acceptance of appointment
by the successor Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 calendar days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders
of a majority in principal amount of the outstanding Notes, delivered to the
Trustee and to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 calendar days
after the giving of notice of removal, the Trustee being removed may petition
any court of competent jurisdiction for the appointment of a successor
Trustee.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 310(b)
of the Trust Indenture Act after written request therefor by the Company
or by any Holder who has been a bona fide Holder of a Note for at least
six months, unless the Trustee's duty to resign is stayed in accordance
with the provisions of Section 310(b) of the Trust Indenture Act; or
(ii) the Trustee shall cease to be eligible under Section
7.10 hereof and shall fail to resign after written request therefor by
the Company or by any such Holder; or
(iii) the Trustee shall become incapable of acting or a
decree or order for relief by a court having jurisdiction in the
premises shall have been entered in respect of the Trustee in an
involuntary case under the United States bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal or state
bankruptcy, insolvency or similar law; or a decree or order
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by a court having jurisdiction in the premises shall have been entered
for the appointment of a receiver, custodian, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Trustee or of
its Property or affairs, or any public officer shall take charge or
control of the Trustee or of its Property or affairs for the purpose of
rehabilitation, conservation, winding up or liquidation; or
(iv) the Trustee shall commence a voluntary case under the
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or similar law
or shall consent to the appointment of or taking possession by a
receiver, custodian, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Trustee or its Property or affairs, or
shall make an assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts generally as they become due, or
shall take corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof,
any Holder who has been a bona fide Holder of a Note for at least six months
may, on behalf of such Holder and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee for the Notes. If an instrument of
acceptance by a successor Trustee shall not have been delivered to the
Trustee within 30 calendar days after the giving of notice of removal, the
Trustee being removed may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable
of acting, or if a vacancy shall occur in the office of Trustee for any
cause, the Company, by or pursuant to a Board Resolution, shall promptly
appoint a successor Trustee. If, within one year after such resignation,
removal or incapability, or the occurrence of such vacancy, a successor
Trustee shall be appointed by the Holders of a majority in principal amount
of the outstanding Notes delivered to the Company and the retiring Trustee,
the successor Trustee so appointed shall, forthwith upon its acceptance of
such appointment in accordance with this Section 7.08, become the successor
Trustee and to that extent replace any successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company
or the Holders and shall have accepted appointment in the manner hereinafter
provided, any Holder that has been a bona fide Holder of a Note for at least
six months may, subject to Section 6.10 hereof, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such resignation, removal and appointment by first class
mail, postage prepaid, to the Holders as their names and addresses appear in
the Security Register. Each notice shall include the name of the successor
Trustee with respect to the Notes and the address of its Corporate Trust
Office.
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(g) In the event of an appointment hereunder of a successor
Trustee, each such successor Trustee so appointed shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee but, on request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment
of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee,
and shall duly assign, transfer and deliver to such successor Trustee all
Property and money held by such former Trustee hereunder, subject to its
Lien, if any, provided for in Section 7.07 hereof.
(h) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article VII and under the Trust Indenture Act.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. Any corporation into
which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder; PROVIDED that such
corporation shall be otherwise qualified and eligible under this Article VII
and under the Trust Indenture Act, without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case
any Notes shall have been authenticated, but not delivered, by the Trustee
then in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Notes so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Notes. In the event that any Notes shall not have been
authenticated by such predecessor Trustee, any such successor Trustee may
authenticate and deliver such Notes, in either its own name or that of its
predecessor Trustee, with the full force and effect which this Indenture
provides for the certificate of authentication of the Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all
times be a Trustee hereunder which shall be
(i) a corporation organized and doing business under
the laws of the United States of America, any State or Territory thereof
or the District of Columbia, authorized under such laws to exercise
corporate trust powers, and subject to supervision or examination by
Federal, State, Territorial or District of Columbia authority, or
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(ii) a corporation or other Person organized and doing
business under the laws of a foreign government that is permitted to act
as Trustee pursuant to a rule, regulation or order of the Commission,
authorized under such laws to exercise corporate trust powers, and
subject to supervision or examination by authority of such foreign
government or a political subdivision thereof substantially equivalent
to supervision or examination applicable to United States institutional
trustees,
in either case having a combined capital and surplus of at least $50,000,000.
If such Person publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purposes of this Section 7.10, the combined
capital and surplus of such corporation shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. Neither the Company nor any Affiliate of the Company shall serve
as Trustee hereunder. If at any time the Trustee shall cease to be eligible
to serve as Trustee hereunder pursuant to the provisions of this Section
7.10, it shall resign immediately in the manner and with the effect specified
in this Article VII.
If the Trustee has or shall acquire any "conflicting interest"
within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee
and the Company shall in all respects comply with the provisions of Section
310(b) of the Trust Indenture Act. Nothing herein shall prevent the Trustee
from filing with the Commission the application referred to in the
penultimate paragraph of Section 310(b) of the Trust Indenture Act.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with Section 311(a) of the Trust Indenture Act,
excluding any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject
to Section 311(a) of the Trust Indenture Act to the extent indicated therein.
ARTICLE VIII
DEFEASANCE
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE OR
COVENANT DEFEASANCE. The Company may elect, at its option, at any time, to
have Section 8.02 or Section 8.03 hereof applied to the outstanding Notes (in
whole and not in part) upon compliance with the conditions set forth below in
this Article VIII. Such election shall be evidenced by a Board Resolution
delivered to the Trustee and shall specify whether the Notes are being
defeased to Stated Maturity or to a specified Redemption Date determined in
accordance with the terms of this Indenture and the Notes.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's
exercise under Section 8.01 hereof, of its option to have this Section 8.02
applied to the outstanding Notes (in whole and not in part), the Company
shall be deemed to have been discharged from its obligations with respect to
such Notes as provided in this Section 8.02 on and after the date the
conditions set forth
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in Section 8.04 hereof are satisfied (hereinafter called "Legal Defeasance").
For this purpose, such Legal Defeasance means that the Company and the
Subsidiary Guarantors shall be deemed to have paid and discharged the entire
indebtedness represented by such Notes, which shall thereafter be deemed to
be "outstanding" only for the purposes of Section 8.05 hereof and the other
Sections of this Indenture referred to in (a) and (b) below, and to have
satisfied all its other obligations under such Notes and this Indenture
insofar as such Notes are concerned (and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging the
same), subject to the following which shall survive until otherwise
terminated or discharged hereunder:
(a) the rights of Holders of such Notes to receive, solely from the
trust fund described in Section 8.04 hereof and as more fully set forth
in such Section 8.04 payments in respect of the principal of and any
premium and interest on such Notes when payments are due,
(b) the Company's and the Subsidiary Guarantors' obligations with
respect to such Notes under Sections 2.06, 2.07, 2.09, 4.02, 4.03 and
4.04 hereof and Article XI,
(c) the rights, powers, trusts, duties and immunities of the
Trustee under this Indenture and the Company's obligations in connection
therewith,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may
exercise its option to have this Section 8.02 applied to the outstanding
Notes (in whole and not in part) notwithstanding the prior exercise of its
option to have Section 8.03 hereof applied to such Notes.
SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise
under Section 8.01 hereof of its option to have this Section 8.03 applied to
the outstanding Notes (in whole and not in part), (i) the Company and the
Subsidiary Guarantors shall be released from their obligations under Section
5.01(iii), Sections 4.05 through 4.17, inclusive, and any covenant added to
this Indenture subsequent to the date of this Indenture pursuant to Section
9.01 hereof, (ii) the occurrence of any event specified in Section 6.01(c) or
Section 6.01(d) hereof, with respect to any of Section 5.01(iii), Sections
4.05 through 4.17, inclusive, and any covenant added to this Indenture
subsequent to the date of this Indenture pursuant to Section 9.01 hereof,
shall be deemed not to be or result in an Event of Default, in each case with
respect to such Notes as provided in this Section 8.03 on and after the date
the conditions set forth in Section 8.04 hereof are satisfied (hereinafter
called "Covenant Defeasance") and the Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall
not be deemed outstanding for accounting purposes). For this purpose, such
Covenant Defeasance means that, with respect to such Notes, the Company and
the Subsidiary Guarantors may omit to comply with and shall have no liability
in
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respect of any term, condition or limitation set forth in any such specified
Section (to the extent so specified in the case of Sections 6.01(c) and
6.01(d) hereof), whether directly or indirectly, by reason of any reference
elsewhere herein to any such Section or by reason of any reference in any
such Section to any other provision herein or in any other document; but the
remainder of this Indenture and such Notes shall be unaffected thereby. In
addition, upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03 hereof, subject to the satisfaction of the
conditions set forth in Section 8.04 hereof, Sections 6.01 (e) and 6.01(f)
hereof shall thereafter not constitute Events of Default.
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The
following shall be the conditions to the application of Section 8.02 or
Section 8.03 hereof to the outstanding Notes:
(a) The Company or any Subsidiary Guarantor shall irrevocably have
deposited or caused to be deposited with the Trustee as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to the benefits of the
Holders of such Notes, (i) money in an amount, or (ii) U.S. Government
Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money in an
amount, or (iii) a combination thereof, in each case sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or any such other qualifying trustee) to pay and discharge, the
principal of, premium, if any, and any installment of interest on such
Notes on the Stated Maturity thereof or applicable Redemption Date, as
the case may be, in accordance with the terms of this Indenture and such
Notes.
(b) In the event of an election to have Section 8.02 hereof apply
to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has received
from, or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date of this Indenture, there has been a change
in the applicable Federal income tax law, in either case (i) or (ii) to
the effect that, and based thereon such opinion shall confirm that, the
Holders of such Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of the deposit, Legal Defeasance
and discharge to be effected with respect to such Notes and will be
subject to Federal income tax on the same amount, in the same manner and
at the same times as would be the case if such deposit, Legal Defeasance
and discharge were not to occur.
(c) In the event of an election to have Section 8.03 hereof apply
to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of such
Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the deposit and Covenant Defeasance to be
effected with respect to such Notes and will be subject to Federal
income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit and Covenant Defeasance were not to
occur.
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(d) No Default or Event of Default with respect to the outstanding
Notes shall have occurred and be continuing at the time of such deposit
(other than a Default or Event of Default resulting from the borrowing
of funds to be applied to such deposit) after giving effect thereto or,
with respect to a Default or Event of Default specified in Section
6.01(g) or Section 6.01(h), any time on or prior to the 123rd calendar
day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 123rd calendar
day).
(e) Such Legal Defeasance or Covenant Defeasance shall not cause
the Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act (assuming for the purpose of this clause (e) that
all Notes are in default within the meaning of such Act).
(f) Such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound.
(g) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company.
(h) Such Legal Defeasance or Covenant Defeasance shall not result
in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as
amended, unless such trust shall be registered under such Act or exempt
from registration thereunder.
(i) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Legal Defeasance or Covenant Defeasance
have been complied with.
SECTION 8.5. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; MISCELLANEOUS PROVISIONS. All money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee
pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be
held in trust and applied by the Trustee, in accordance with the provisions
of such Notes and this Indenture, to the payment, either directly or through
any such Paying Agent as the Trustee may determine, to the Holders of such
Notes, of all sums due and to become due thereon in respect of principal and
any premium and interest, but money so held in trust need not be segregated
from other funds except to the extent required by law. The Company shall pay
and indemnify the Trustee against any tax, fee or other charge imposed on or
assessed against the U.S. Government Obligations deposited pursuant to
Section 8.04 hereof or the principal and interest received in respect thereof
other than any such tax, fee or other charge which by law is for the account
of the Holders of outstanding Notes.
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Anything in this Article VIII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Order any money or U.S. Government Obligations held by it as provided in
Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof that would then
be required to be deposited to effect the Legal Defeasance or Covenant
Defeasance, as the case may be, with respect to the outstanding Notes.
SECTION 8.6. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money in accordance with this Article VIII with respect
to any Notes by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application
then the obligations under this Indenture and such Notes from which the
Company has been discharged or released pursuant to Section 8.02 or 8.03
hereof shall be revived and reinstated as though no deposit had occurred
pursuant to this Article VIII with respect to such Notes, until such time as
the Trustee or Paying Agent is permitted to apply all money held in trust
pursuant to Section 8.05 hereof with respect to such Notes in accordance with
this Article VIII; provided that if the Company or any Subsidiary Guarantor
makes any payment of principal of or any premium or interest on any such Note
following such reinstatement of its obligations, the Company or such
Subsidiary Guarantor, as the case may be, shall be subrogated to the rights
(if any) of the Holders of such Notes to receive such payment from the money
so held in trust.
ARTICLE IX
AMENDMENTS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS. The Company, the
Subsidiary Guarantors and the Trustee may, at any time, and from time to
time, without notice to or consent of any Holder of Notes, enter into one or
more indentures supplemental hereto, in form satisfactory to the Trustee, for
any of the following purposes:
(a) to evidence the succession of another Person to the Company
and the assumption by such successor of the covenants of the Company
herein and contained in the Notes; or
(b) to add to the covenants of the Company, for the benefit of the
Holders of all of the Notes, or to surrender any right or power herein
conferred upon the Company; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in place
of Certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to secure the Notes; or
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(g) to cure any ambiguity herein, or to correct or supplement
any provision hereof which may be inconsistent with any other provision
hereof or to add any other provisions with respect to matters or
questions arising under this Indenture; provided that such actions shall
not adversely affect the interests of the Holders of Notes in any
material respect; or
(h) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act; or
(i) to provide for assumption of a Subsidiary Guarantor's
obligations under its Subsidiary Guarantee upon a merger, consolidation,
sale, assignment, transfer, lease, conveyance or other disposition of
all or substantially all of the assets, of such Subsidiary Guarantor, in
compliance with Section 11.02; or
(j) to add or release a Subsidiary Guarantor in compliance with the
provisions of Article XI.
SECTION 9.2. WITH CONSENT OF HOLDERS. With the consent of the
Holders of not less than a majority in principal amount of the outstanding
Notes (which consent may, but need not, be given in connection with any
tender offer or exchange offer for the Notes), by Act of said Holders
delivered to the Company, each of the Subsidiary Guarantors and the Trustee,
the Company, each of the Subsidiary Guarantors and the Trustee may enter into
one or more indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of this Indenture or of modifying in any manner the rights of the Holders
(including Section 4.07 and Section 4.08 hereof); provided that no such
supplemental indenture shall, without the consent of the Holder of each
outstanding Note,
(a) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the Stated Maturity of any
Note or alter or waive any of the provisions with respect to the
redemption of the Notes, except as provided above with respect to
Sections 4.07 and 4.08 hereof;
(c) reduce the rate of or change the time for payment of interest,
including Defaulted Interest, on any Note;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the then outstanding Notes and a waiver of
the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
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(f) make any change in the provisions of this Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note (other than
a payment required by Section 4.07 or Section 4.08 hereof);
(h) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions; or
(i) modify any provisions of this Indenture relating to the
relative ranking of the Notes or the Subsidiary Guarantees in a manner
adverse to the Holders thereof.
It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
After an amendment or supplement under this Section or a waiver
under Section 6.04 becomes effective, the Company shall mail to the Holders
of Notes affected thereby a notice briefly describing the amendment,
supplement or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity
of any such amended or supplemental Indenture or waiver.
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the
execution of any supplemental indenture under this Article IX, this Indenture
shall be modified in accordance therewith, and such supplemental indenture
shall form a part of this Indenture for all purposes; and every Holder of
Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment
or supplement to this Indenture or the Notes shall comply with the Trust
Indenture Act as then in effect.
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A
consent to an amendment, supplement or a waiver by a Holder of a Note shall
bind the Holder and every subsequent Holder of such Note or portion of such
Note that evidences the same debt as the consenting Holder's Note, even if
notation of the consent or waiver is not made on such Note; provided that any
such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Note or portion of such Note if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective. After an amendment, supplement or waiver becomes effective
pursuant to this Article IX, it shall bind every Holder.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to give their consent or
take any other action described above or
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required or permitted to be taken pursuant to this Indenture. If a record
date is fixed, then notwithstanding the immediately preceding paragraph,
those Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to give such consent or
to revoke any consent previously given or to take any such action, whether or
not such Persons continue to be Holders after such record date. No such
consent shall be valid or effective for more than 120 calendar days after
such record date.
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES. If a supplemental
indenture changes the terms of a Note, the Trustee may require the Holder
thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it
to the Holder. Alternatively, if the Company or the Trustee so determines,
the Company in exchange for such Note shall issue and the Trustee shall
authenticate a new Note that reflects the changed terms. Failure to make the
appropriate notation or to issue a new Note shall not affect the validity of
such amendment or supplement.
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES. The
Trustee shall execute any supplemental indenture authorized pursuant to this
Article IX if such supplemental indenture does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but shall not be required to, execute such supplemental
indenture. In executing any supplemental indenture, the Trustee shall be
entitled to receive indemnity reasonably satisfactory to it and to receive,
and (subject to Section 7.01 hereof) shall be fully protected in relying
upon, an Officers' Certificate (which need only cover the matters set forth
in clause (a) below) and an Opinion of Counsel provided by the Company
stating that:
(a) such supplemental indenture is authorized or permitted by this
Indenture and that all conditions precedent to the execution, delivery
and performance of such supplemental indenture have been satisfied;
(b) the Company has all necessary corporate power and authority to
execute and deliver the supplemental indenture and that the execution,
delivery and performance of such supplemental indenture has been duly
authorized by all necessary corporate action of the Company;
(c) the execution, delivery and performance of the supplemental
indenture do not conflict with, or result in the breach of or constitute
a default under any of the terms, conditions or provisions of (i) this
Indenture, (ii) the charter documents and by-laws of the Company, or
(iii) any material agreement or instrument to which the Company is
subject;
(d) to the best knowledge and belief of legal counsel writing such
Opinion of Counsel, the execution, delivery and performance of the
supplemental indenture do not conflict with, or result in the breach of
any of the terms, conditions or provisions of (i) any law or regulation
applicable to the Company, or (ii) any material order, writ, injunction
or decree of any court or governmental instrumentality applicable to the
Company;
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(e) such supplemental indenture has been duly and validly executed
and delivered by the Company, and this Indenture together with such
supplemental indenture constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles; and
(f) this Indenture together with such amendment or supplement
complies with the Trust Indenture Act.
SECTION 9.08. EFFECT ON SENIOR INDEBTEDNESS. No supplemental
indenture shall adversely affect the rights of holders of Senior Indebtedness
under Article X hereof or the holders of Guarantor Senior Indebtedness under
Sections 11.08, 11.09, 11.10, 11.11, 11.12, 11.13, 11.14, 11.15, 11.16, or
11.19 hereof unless expressly consented to in writing by or on behalf of such
holders (or by any specified percentage of holders of a class of Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, required
to consent thereto pursuant to the terms of the agreement or instrument
creating, evidencing or governing such Senior Indebtedness or Guarantor
Senior Indebtedness, as the case may be), in which event such supplemental
indenture shall be binding on all successors and assigns of such holders and
on all persons who become holders of such Senior Indebtedness or Guarantor
Senior Indebtedness issued after the date of such amendment or modification.
ARTICLE X
SUBORDINATION
SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and
each Holder by accepting a Note agrees, that the Indebtedness evidenced by
the Note and the payment of the principal of (and premium, if any, on) and
interest on, such Note is expressly made subordinate and subject in right of
payment, to the extent and in the manner provided in this Article X, to the
prior payment in full of all Senior Indebtedness (whether outstanding on the
date hereof or hereafter created, incurred, assumed or guaranteed), and that
the subordination is for the benefit of the holders of Senior Indebtedness.
This Article X shall constitute a continuing offer to all Persons who become
holders of, or continue to hold, Senior Indebtedness, and such provisions are
made for the benefit of the holders of Senior Indebtedness.
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, in an assignment
for the benefit of creditors or any marshaling of the Company's assets and
liabilities:
(a) holders of Senior Indebtedness shall be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness)
before Holders shall be entitled to receive any payment with respect to
principal of (or premium, if any, on) or interest on the Notes or on
account of the purchase, redemption or other acquisition of the Notes
(including pursuant to an Asset Sale Offer or Change of Control Offer)
(except that Holders may receive (i) securities that are subordinated to
at least the same extent as the Notes are subordinated
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to (A) Senior Indebtedness and (B) any securities issued in exchange for
Senior Indebtedness and (ii) payments and other distributions made from
any defeasance trust created pursuant to Section 8.01 hereof); and
(b) until all Obligations with respect to Senior Indebtedness (as
provided in subsection (a) above) are paid in full in cash, any
distribution to which Holders would be entitled but for this Article
shall be made to holders of Senior Indebtedness (except that Holders may
receive (i) securities that are subordinated to at least the same extent
as the Notes to (A) Senior Indebtedness and (B) any securities issued in
exchange for Senior Indebtedness and (ii) payments and other
distributions made from any defeasance trust created pursuant to Section
8.01 hereof), as their interests may appear.
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS. The
Company may not make any payment or distribution to the Trustee or any Holder
in respect of Obligations with respect to the Notes and may not acquire from
the Trustee or any Holder any Notes for cash or property (other than (i)
securities that are subordinated to at least the same extent as the Notes to
(A) Senior Indebtedness and (B) any securities issued in exchange for Senior
Indebtedness and (ii) payments and other distributions made from any
defeasance trust created pursuant to Section 8.01 hereof) until all principal
and other Obligations with respect to the Senior Indebtedness have been paid
in full if:
(a) a default in the payment of any principal, premium, if any, or
interest with respect to Designated Senior Indebtedness occurs and is
continuing beyond any applicable grace period in the agreement,
indenture or other document governing such Designated Senior
Indebtedness; or
(b) a default, other than such payment default, on Designated
Senior Indebtedness occurs and is continuing that then permits holders
of such Designated Senior Indebtedness to accelerate its maturity and
the Trustee receives a notice of such default (a "Payment Blockage
Notice") from a Person who may give it pursuant to Section 10.11 hereof.
If the Trustee receives any such Payment Blockage Notice, no subsequent
Payment Blockage Notice shall be effective for purposes of this Section
10.03 unless and until at least 360 days shall have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No
default specified in this clause (b) that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions in
respect of the Notes and may acquire them upon the earlier of:
(i) in the case of a default referred to in Section 10.03(a),
the date upon which such default is cured or waived, or
(ii) in the case of a default referred to in Section 10.03(b)
hereof, the earlier of the date on which such default is cured or waived
or 179 days after the date on which the applicable
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Payment Blockage Notice is received, unless the maturity of such
Designated Senior Indebtedness has been accelerated,
if, and only if, this Article X otherwise permits the payment, distribution
or acquisition at the time of such payment or acquisition.
SECTION 10.04. ACCELERATION OF NOTES. If payment of the Notes is
accelerated because of an Event of Default, the Company shall promptly notify
the Representatives of holders of Designated Senior Indebtedness and
Designated Guarantor Senior Indebtedness of the acceleration.
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. In the event
that the Trustee or any Holder receives any payment of any Obligations with
respect to the Notes at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by Section
10.03 hereof, such payment shall be held by the Trustee or such Holder, in
trust for the benefit of, and shall be paid forthwith over and delivered,
upon written request, to, the holders of Senior Indebtedness as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Indebtedness may have been
issued, for application to the payment of all Obligations with respect to
Senior Indebtedness remaining unpaid to the extent necessary to pay such
Obligations in full in accordance with their terms, after giving effect to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article X, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness, and shall not
be liable to any such holders if the Trustee shall pay over or distribute to
or on behalf of Holders or the Company or any other Person money or assets to
which any holders of Senior Indebtedness shall be entitled by virtue of this
Article X, except if such payment is made as a result of the willful
misconduct or gross negligence of the Trustee.
SECTION 10.06. NOTICE BY COMPANY. The Company shall promptly notify
the Trustee and the Paying Agent of any facts known to the Company that would
cause a payment of any Obligations with respect to the Notes to violate this
Article X, but failure to give such notice shall not affect the subordination
of the Notes to the Senior Indebtedness as provided in this Article X.
SECTION 10.07. SUBROGATION. After all Senior Indebtedness is paid
in full and until the Notes are paid in full, Holders shall be subrogated
(equally and ratably with all other Indebtedness PARI PASSU with the Notes)
to the rights of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness to the extent that distributions otherwise
payable to the Holders have been applied to the payment of Senior
Indebtedness. A distribution made under this Article X to holders of Senior
Indebtedness that otherwise would have been made to Holders is not, as
between the Company and Holders, a payment by the Company on the Notes.
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SECTION 10.08. RELATIVE RIGHTS. This Article X defines the relative
rights of Holders and holders of Senior Indebtedness. Nothing in this
Indenture shall:
(i) impair, as between the Company and Holders, the obligation of
the Company, which is absolute and unconditional, to pay principal of,
premium, if any, on and interest on the Notes in accordance with their
terms;
(ii) affect the relative rights of Holders and creditors of the
Company other than their rights in relation to holders of Senior
Indebtedness; or
(iii) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default, subject to the rights of
holders and owners of Senior Indebtedness to receive distributions and
payments otherwise payable to Holders.
If the Company fails because of this Article X to pay principal of,
premium, if any, on or interest on a Note on the due date, the failure is still
a Default or Event of Default.
SECTION 10.09. NO WAIVER OF SUBORDINATION. (a) No right of any holder
of Senior Indebtedness to enforce the subordination of the Indebtedness
evidenced by the Notes shall be impaired by any act or failure to act by the
Company or any Holder or by the failure of the Company or any Holder to
comply with this Indenture.
(b) Without in any way limiting the generality of paragraph (a) of this
Section, the holders of any Senior Indebtedness, in accordance with the terms
of the instrument or agreement evidencing their Senior Indebtedness, may, at
any time and from time to time, without the consent of or notice to the
Trustee or the Holders, without incurring responsibility to the Holders and
without impairing or releasing the subordination or other benefits provided in
this Article X, or the obligations hereunder of the Holders to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew,
exchange, amend, increase or alter, Senior Indebtedness or the terms of any
instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding or any liability of any obligor thereon (unless
such change, extension, amendment, increase or other alteration results in
such Indebtedness no longer being Senior Indebtedness as defined in this
Indenture); (ii) sell, exchange, release or otherwise deal with any Property
pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) settle or
compromise any Senior Indebtedness or any liability of any obligor thereon or
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to holders of Senior Indebtedness,
the distribution may be made and the notice given to their Representative.
Upon any payment or distribution of assets of the Company referred to in
this Article X, the Trustee and the Holders shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other Indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article X.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a Person representing himself to be a holder of Senior Indebtedness
(or a trustee or agent on behalf of such holder) to establish that such notice
has been given by a holder of Senior Indebtedness (or a trustee or agent on
behalf of any such holder). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any Person
as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article X, the Trustee may request such Person
to furnish evidence to the reasonable satisfaction of the Trustee as to the
amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such
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payment or distribution and any other facts pertinent to the rights of such
Person under this Article X, and if such evidence is not furnished, the
Trustee may defer any payment which it may be required to make for the benefit
of such Person pursuant to the terms of this Indenture pending judicial
determination as to the rights of such Person to receive such payment.
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the
provisions of this Article X or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts
that would prohibit the making of any payment or distribution by the Trustee,
and the Trustee and the Paying Agent may continue to make payments on the
Notes, unless the Trustee shall have received at its Corporate Trust Office
at least five Business Days prior to the date of such payment written notice
of facts that would cause the payment of any Obligations with respect to the
Notes to violate Article X or XI. Only the holders of Designated Senior
Indebtedness or a Representative thereof may give the notice. Nothing in
Article X or XI shall impair the claims of, or payments to, the Trustee under
or pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Paying Agent may do the same with like rights.
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a
Note by the Holder's acceptance thereof authorizes and directs the Trustee on
the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article X, and appoints the
Trustee to act as the Holder's attorney-in-fact for any and all such purposes.
If the Trustee does not file a proper proof of claim or proof of debt in the
form required in any judicial proceeding relative to the Company (or any other
obligor upon the Notes), its creditors or its property at least 30 days before
the expiration of the time to file such claim, any Representative is hereby
authorized to file an appropriate claim for and on behalf of the Holders of
the Notes.
SECTION 10.13. AMENDMENTS. The provisions of this Article X shall not
be amended or modified in a manner materially adverse to the Holders of Senior
Indebtedness without the written consent of the holders of all Designated
Senior Indebtedness.
ARTICLE XI
SUBSIDIARY GUARANTEES
SECTION 11.01. UNCONDITIONAL GUARANTEE.
Each Subsidiary Guarantor hereby, jointly and severally, unconditionally
guarantees (such guarantee to be referred to herein as this "Subsidiary
Guarantee" with all such guarantees being referred to herein as the
"Subsidiary Guarantees") to each Holder and to the Trustee the due and
punctual payment of the principal of, premium, if any, and interest on the
Notes and all other amounts due and payable under this Indenture and the
Notes by the Company, whether at maturity, by acceleration, redemption,
repurchase or otherwise, including, without limitation, interest on the
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overdue principal of, premium, if any, and interest on the Notes, to the extent
lawful, all in accordance with the terms hereof and thereof; subject, however,
to the limitations set forth in Section 11.05.
Failing payment when due of any amount so guaranteed for whatever
reason, the Subsidiary Guarantors will be jointly and severally obligated to
pay the same immediately. Each Subsidiary Subsidiary Guarantor hereby
agrees that its obligations hereunder shall be unconditional irrespective of
the validity, regularity or enforceability of the Notes or this Indenture,
the absence of any action to enforce the same, any waiver or consent by any
Holder of the Notes with respect to any provisions hereof or thereof, the
recovery of any judgment against the Company, any action to enforce the same
or any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a Subsidiary Guarantor. Each Subsidiary Guarantor
hereby waives diligence, presentment, demand of payment, filing of claims
with a court in the event of insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company, protest, notice and
all demands whatsoever and covenants that this Subsidiary Guarantee will not
be discharged except by complete performance of the obligations contained in
the Notes, this Indenture and in this Subsidiary Guarantee. If any Holder or
the Trustee is required by any court or otherwise to return to the Company,
any Subsidiary Guarantor, or any custodian, trustee, liquidator or other
similar official acting in relation to the Company or any Subsidiary Guarantor,
any amount paid by the Company or any Subsidiary Guarantor to the Trustee or
such Holder, this Subsidiary Guarantee, to the extent theretofore discharged,
shall be in full force and effect. Each Subsidiary Guarantor agrees it shall
not be entitled to any right of subrogation in relation to the Holders in
respect of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby. Each Subsidiary Guarantor further agrees
that, as between each Subsidiary Guarantor, on the one hand, and the Holders
and the Trustee, on the other hand, (x) the maturity of the obligations
guaranteed hereby may be accelerated as provided in Article VII for the
purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction
or other prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article VII and subject to the rescission thereof as provided
therein, such obligations (whether or not due and payable) shall forthwith
become due and payable by each Subsidiary Guarantor for the purpose of this
Subsidiary Guarantee.
SECTION 11.02. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN
TERMS.
(a) Except as set forth in Articles IV and V, nothing contained in
this Indenture or in any of the Notes shall prevent any consolidation or
merger of a Subsidiary Guarantor, with or into the Company or another
Subsidiary Guarantor or shall prevent any sale, assignment, transfer,
lease, conveyance or other disposition of the property of a Subsidiary
Guarantor as an entirety or substantially as an entirety, to the Company
or another Subsidiary Guarantor.
(b) Except as set forth in Articles IV and V hereof, nothing
contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of a Subsidiary Guarantor with or into a Person
other than the Company or a Subsidiary Guarantor (whether or not
affiliated with
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the Subsidiary Guarantor), or successive consolidations or mergers in which
a Subsidiary Guarantor or its successor or successors shall be a party or
parties, or shall prevent any sale, assignment, transfer, lease, conveyance
or other disposition of all or substantially all of the property of a
Subsidiary Guarantor, to a Person other than the Company or another
Subsidiary Guarantor (whether or not affiliated with the Subsidiary
Guarantor); PROVIDED, that (i) if the surviving Person is not the Company
or a Subsidiary Guarantor, the surviving corporation agrees to assume such
Subsidiary Guarantor's Subsidiary Guarantee and all its obligations
pursuant to this Indenture (except to the extent that Section 11.04 would
result in the release of such Subsidiary Guarantee), (ii) immediately
after giving effect to such transaction no Default or Event of Default
would exist or be continuing, and (iii) each Subsidiary Guarantor hereby
covenants and agrees that, upon any such consolidation, merger, sale,
conveyance or other disposition, such Subsidiary Guarantor's Subsidiary
Guarantee set forth in this Article XI, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by such Subsidiary Guarantor, shall be expressly
assumed (in the event that the Subsidiary Guarantor is not the surviving
corporation in a merger), by supplemental indenture reasonably satisfactory
in form to the Trustee, executed and delivered to the Trustee, by such
Person formed by such consolidation, or into which the Subsidiary Guarantor
shall have merged, or by the Person that shall have acquired such Property
(except to the extent the following Section 11.04 would result in the
release of such Subsidiary Guarantee, in which case such surviving Person
or transferee of such Property shall not have to execute any such
supplemental indenture and shall not have to assume such Subsidiary
Guarantor's Subsidiary Guarantee). In the case of any such consolidation,
merger, sale, conveyance or other disposition and upon the assumption by
the successor Person, by supplemental indenture executed and delivered to
the Trustee and reasonably satisfactory in form to the Trustee of the due
and punctual performance of all of the covenants and conditions of this
Indenture to be performed by the Subsidiary Guarantor, such successor
Person shall succeed to and be substituted for the Subsidiary Guarantor
with the same effect as if it had been named herein as the initial
Subsidiary Guarantor.
SECTION 11.03. ADDITION OF SUBSIDIARY GUARANTORS.
(a) The Company agrees to cause each Person that shall become a
Subsidiary after the date of this Indenture to execute and deliver a
supplemental indenture pursuant to which such Person guarantees the payment
of the Notes on the same terms and conditions as the Subsidiary Guarantees
by the Subsidiary Guarantors.
(b) Any Person that was not a Subsidiary Guarantor on the date of
this Indenture may become a Subsidiary Guarantor by executing and
delivering to the Trustee (i) a supplemental indenture in form and
substance satisfactory to the Trustee, which subjects such Person to the
provisions of this Indenture as a Subsidiary Guarantor and (ii) an
Opinion of Counsel and Officers' Certificate to the effect that such
supplemental indenture has been duly authorized and executed by such
Person and constitutes the legal, valid, binding and enforceable
obligation of such Person (subject to such customary exceptions
concerning creditors' rights and equitable principles as may
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be acceptable to the Trustee in its discretion and provided that no
opinion need be rendered concerning the enforceability of the Subsidiary
Guarantee).
SECTION 11.04. RELEASE OF A SUBSIDIARY GUARANTOR.
(a) Upon the sale or other disposition (by merger or otherwise) of
a Subsidiary Guarantor (or all or substantially all of its assets) to a
Person other than the Company or another Subsidiary Guarantor and pursuant
to a transaction that is otherwise in compliance with this Indenture
(including as described in Section 11.02 or Article V), such Subsidiary
Guarantor shall be deemed released from all of its Subsidiary Guarantees
and related obligations in this Indenture; PROVIDED, HOWEVER, that any such
termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests which secure, other
Indebtedness of the Company or any Subsidiary shall also terminate or be
released upon such sale or other disposition.
(b) Each Subsidiary Guarantor that is designated as an Unrestricted
Subsidiary by the Company in accordance with the provisions of this
Indenture shall be deemed released from all of its Subsidiary Guarantees
and related obligations in this Indenture for so long as it remains an
Unrestricted Subsidiary.
(c) The Trustee shall deliver an appropriate instrument evidencing
such release upon receipt of a request by the Company accompanied by an
Officers' Certificate and an Opinion of Counsel certifying that such sale
or other disposition was made by the Company or the Subsidiary Guarantor,
as the case may be, in accordance with the provisions of this Indenture.
Any Subsidiary Guarantor not so released remains liable for the full amount
of principal of and interest on the Notes as provided in this Article XI.
(d) Any Subsidiary Guarantor not released in accordance with this
Section 11.04 shall remain liable for the full amount of principal of (and
premium, if any, on) and interest on the Securities as provided in this
Article XI.
SECTION 11.05. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY.
Each Subsidiary Guarantor and by its acceptance hereof each Holder
hereby confirms that it is the intention of all such parties that the
guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee
not constitute a fraudulent transfer or conveyance for purposes of the
Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar federal, state or foreign law. To
effectuate the foregoing intention, the Holders and each Subsidiary Guarantor
irrevocably agree that the obligations of each Subsidiary Guarantor under the
Subsidiary Guarantee shall be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Subsidiary
Guarantee or pursuant to
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Section 11.06, result in the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal, state or foreign law. This Section 11.05
is for the benefit of the creditors of each Subsidiary Guarantor, and, for
purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act and each other similar federal,
state or foreign law, any Indebtedness of a Subsidiary Guarantor incurred
from time to time pursuant to the Credit Facility shall be deemed to have
been incurred prior to the incurrence by such Subsidiary Guarantor of
liability under its Subsidiary Guarantee.
SECTION 11.06. CONTRIBUTION. In order to provide for just and equitable
contribution among the Subsidiary Guarantors, the Subsidiary Guarantors
agree, INTER SE, that in the event any payment or distribution is made by any
Subsidiary Guarantor (a "Funding Guarantor") under the Subsidiary Guarantee,
such Funding Guarantor shall be entitled to a contribution from each other
Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of
each Subsidiary Guarantor (including the Funding Guarantor) for all payments,
damages and expenses incurred by the Funding Guarantor in discharging the
Company's obligations with respect to the Notes or, subject to this Section
11.06, any other Subsidiary Guarantor's obligations with respect to the
Subsidiary Guarantee.
SECTION 11.07. SEVERABILITY. In case any provision of this Subsidiary
Guarantee shall be invalid, illegal or unenforceable, that portion of such
provision that is not invalid, illegal or unenforceable shall remain in
effect, and the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
SECTION 11.08. SUBSIDIARY GUARANTEES SUBORDINATED TO GUARANTOR SENIOR
INDEBTEDNESS. Each Subsidiary Guarantor agrees, and each Holder by accepting
a Note agrees, that the Indebtedness evidenced by its Subsidiary Guarantee is
subordinate and subject in right of payment, to the extent and in the manner
provided in this Article XI, to the prior payment in full of all Guarantor
Senior Indebtedness (whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed), and that the subordination is for
the benefit of the holders of Guarantor Senior Indebtedness, PROVIDED,
HOWEVER, that the Subsidiary Guarantee of such Subsidiary Guarantor, the
Indebtedness represented thereby and the payment of the principal of (and
premium, if any, on) and the interest on the Notes pursuant to such
Subsidiary Guarantee in all respects shall rank PARI PASSU with, or prior to,
all existing and future unsecured indebtedness (including, without
limitation, Indebtedness) of such Subsidiary Guarantor that is subordinated
to its Guarantor Senior Indebtedness. This Article XI shall constitute a
continuing offer to all Persons who become holders of, or continue to hold,
Guarantor Senior Indebtedness, and such provisions are made for the benefit
of the holders of Guarantor Senior Indebtedness.
SECTION 11.09. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any
distribution to creditors of any Subsidiary Guarantor in a liquidation or
dissolution of such Subsidiary Guarantor or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to any Subsidiary
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Guarantor or its property, in an assignment for the benefit of creditors or
any marshaling of any Subsidiary Guarantor's assets and liabilities:
(a) holders of such Subsidiary Guarantor's Guarantor Senior
Indebtedness shall be entitled to receive payment in full in cash of all
Obligations due in respect of such Guarantor Senior Indebtedness (including
interest after the commencement of any such proceeding at the rate specified
in the applicable Guarantor Senior Indebtedness) before Holders shall be
entitled to receive any payment with respect to such Subsidiary Guarantor's
Subsidiary Guarantee (except that Holders may receive (i) securities that are
subordinated to at least the same extent as such Subsidiary Guarantor's
Subsidiary Guarantee to (A) Guarantor Senior Indebtedness and (B) any
securities issued in exchange for Guarantor Senior Indebtedness and (ii)
payments and other distributions made from any defeasance trust created
pursuant to Section 8.01 hereof); and
(b) until all Obligations with respect to such Subsidiary Guarantor's
Guarantor Senior Indebtedness (as provided in subsection (a) above) are paid
in full in cash, any distribution to which Holders would be entitled but for
this Article shall be made to holders of Guarantor Senior Indebtedness
(except that Holders may receive (i) securities that are subordinated to at
least the same extent as such Subsidiary Guarantor's Subsidiary Guarantee to
(A) Guarantor Senior Indebtedness and (B) any securities issued in exchange
for Guarantor Senior Indebtedness and (ii) payments and other distributions
made from any defeasance trust created pursuant to Section 8.01 hereof), as
their interests may appear.
SECTION 11.10. DEFAULT ON DESIGNATED GUARANTOR SENIOR INDEBTEDNESS. No
Subsidiary Guarantor may make any payment or distribution to the Trustee or
any Holder in respect of Obligations with respect to such Subsidiary
Guarantor's Subsidiary Guarantee and may not acquire from the Trustee or any
Holder any Notes for cash or property (other than (i) securities that are
subordinated to at least the same extent as such Subsidiary Guarantor's
Subsidiary Guarantee to (A) Guarantor Senior Indebtedness and (B) any
securities issued in exchange for Guarantor Senior Indebtedness and (ii)
payments and other distributions made from any defeasance trust created
pursuant to Section 8.01 hereof) until all principal and other Obligations
with respect to the Guarantor Senior Indebtedness have been paid in full if:
(a) a default in the payment of any principal, premium, if any, or
interest with respect to Guarantor Designated Senior Indebtedness occurs and
is continuing beyond any applicable grace period in the agreement, indenture
or other document governing such Designated Guarantor Senior Indebtedness; or
(b) a default, other than such payment default, on Designated Guarantor
Senior Indebtedness occurs and is continuing that then permits holders of such
Designated Guarantor Senior Indebtedness to accelerate its maturity and the
Trustee receives a notice of such default (a "Subsidiary Guarantor Payment
Blockage Notice") from a Person who may give it pursuant to Section 11.17
hereof. If the Trustee receives any such Subsidiary Guarantor Payment
Blockage Notice, no subsequent Subsidiary Guarantor Payment Blockage Notice
shall be effective for purposes of this
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Section 11.10 unless and until at least 360 days shall have elapsed since the
effectiveness of the immediately prior Subsidiary Guarantor Payment Blockage
Notice. No default specified in this clause (b) that existed or was continuing
on the date of delivery of any Subsidiary Guarantor Payment Blockage Notice to
the Trustee shall be, or be made, the basis for a subsequent Subsidiary
Guarantor Payment Blockage Notice.
Such Subsidiary Guarantor may and shall resume payments on and
distributions in respect of its Subsidiary Guarantee and may acquire them
upon the earlier of:
(i) in the case of a default referred to in Section 11.10(a), the
date upon which such default is cured or waived, or
(ii) in the case of a default referred to in Section 11.10(b) hereof,
the earlier of the date on which such default is cured or waived or 179
days after the date on which the applicable Subsidiary Guarantor Payment
Blockage Notice is received, unless the maturity of such Designated
Guarantor Senior Indebtedness has been accelerated,
if, and only if, this Article XI otherwise permits the payment, distribution
or acquisition at the time of such payment or acquisition.
SECTION 11.11. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that
the Trustee or any Holder receives any payment of any Obligations with
respect to any Subsidiary Guarantee at a time when the Trustee or such
Holder, as applicable, has actual knowledge that such payment is prohibited
by Section 11.09 or 11.10 hereof, such payment shall be held by the Trustee
or such Holder, in trust for the benefit of, and shall be paid forthwith over
and delivered, upon written request, to, the holders of Guarantor Senior
Indebtedness of the applicable Subsidiary Guarantor as their interests may
appear or their Representative under the indenture or other agreement (if
any) pursuant to such Guarantor Senior Indebtedness may have been issued, for
application to the payment of all Obligations with respect to such Subsidiary
Guarantor's Guarantor Senior Indebtedness remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of such Subsidiary Guarantor's Guarantor Senior Indebtedness.
With respect to the holders of any Guarantor Senior Indebtedness, the
Trustee undertakes to perform only such obligations on the part of the
Trustee as are specifically set forth in this Article XI, and no implied
covenants or obligations with respect to the holders of any Guarantor Senior
Indebtedness shall be read into this Indenture against the Trustee. The
Trustee shall not be deemed to owe any fiduciary duty to the holders of
Guarantor Senior Indebtedness, and shall not be liable to any such holders if
the Trustee shall pay over or distribute to or on behalf of Holders or the
Company or any other Person money or assets to which any holders of Guarantor
Senior Indebtedness shall be entitled by virtue of this Article XI, except if
such payment is made as a result of the willful misconduct or gross negligence
of the Trustee.
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SECTION 11.12. NOTICE BY SUBSIDIARY GUARANTOR. Each Subsidiary
Guarantor shall promptly notify the Trustee and the Paying Agent of any facts
known to such Subsidiary Guarantor that would cause a payment of any
Obligations with respect to such Subsidiary Guarantor's Subsidiary Guarantee
to violate this Article XI, but failure to give such notice shall not affect
the subordination of such Subsidiary Guarantor's Subsidiary Guarantee to such
Subsidiary Guarantor's Guarantor Senior Indebtedness as provided in this
Article XI.
SECTION 11.13. SUBROGATION. After all Guarantor Senior Indebtedness of
a Subsidiary Guarantor is paid in full and until the Notes are paid in full,
Holders shall be subrogated (equally and ratably with all other Indebtedness
of such Subsidiary Guarantor PARI PASSU the Notes) to the rights of holders
of such Guarantor Senior Indebtedness to receive distributions applicable to
such Guarantor Senior Indebtedness to the extent that distributions otherwise
payable to the Holders have been applied to the payment of such Guarantor
Senior Indebtedness. A distribution made under this Article XI to holders of
such Guarantor Senior Indebtedness that otherwise would have been made to
Holders is not, as between such Subsidiary Guarantor and Holders, a payment
by such Subsidiary Guarantor on its Subsidiary Guarantee.
SECTION 11.14. RELATIVE RIGHTS. This Article XI defines the relative
rights of Holders and holders of Guarantor Senior Indebtedness. Nothing in
this Indenture shall:
(i) impair, as between the Subsidiary Guarantors and Holders, the
obligation of the Subsidiary Guarantors, which is absolute and
unconditional, to pay principal of, premium, if any, on and interest on
the Subsidiary Guarantees in accordance with their terms;
(ii) affect the relative rights of Holders and creditors of the
Subsidiary Guarantors other than their rights in relation to holders of
Guarantor Senior Indebtedness; or
(iii) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Guarantor Senior Indebtedness to receive
distributions and payments otherwise payable to Holders.
If the Subsidiary Guarantors fail because of this Article XI to pay
principal of, premium, if any, on or interest on a Note on the due date, the
failure is still a Default or Event of Default.
SECTION 11.15. NO IMPAIRMENT OF SUBORDINATION BY SUBSIDIARY GUARANTORS
OR HOLDERS. (a) No right of any holder of Guarantor Senior Indebtedness to
enforce the subordination of the Indebtedness evidenced by any Subsidiary
Guarantor's Subsidiary Guarantee shall be impaired by any act or failure to
act by such Subsidiary Guarantor or any Holder or by the failure of
Subsidiary Guarantors or any Holder to comply with this Indenture.
(b) Without in any way limiting the generality of paragraph (a) of this
Section, the holders of any Guarantor Senior Indebtedness, may, at any time
and from time to time, without the consent of or notice to the Trustee or the
Holders, without incurring responsibility to the Holders and without impairing
or releasing the subordination or other benefits provided in this Article XI,
or the obligations hereunder of the Holders to the holders of Guarantor
Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew,
exchange, amend, increase or alter, Guarantor Senior Indebtedness or the
terms of any instrument evidencing the same or any agreement under which
Guarantor Senior Indebtedness is outstanding or any liability of any obligor
thereon (unless such change, extension, amendment, increase or other
alteration results in such Indebtedness no longer being Guarantor Senior
Indebtedness as defined in this Indenture); (ii) sell, exchange, release or
otherwise deal with any Property pledged, mortgaged or otherwise securing
Guarantor Senior Indebtedness; (iii) settle or compromise any Guarantor
Senior Indebtedness or any liability of any obligor thereon or release any
Person liable in any manner for the collection of Guarantor Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 11.16. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to holders of Guarantor Senior
Indebtedness, the distribution may be made and the notice given to their
Representative.
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Upon any payment or distribution of assets of any Subsidiary Guarantor
referred to in this Article XI, the Trustee and the Holders shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction
or upon any certificate of such Representative or of the liquidating trustee
or agent or other Person making any distribution to the Trustee or to the
Holders for the purpose of ascertaining the Persons entitled to participate
in such distribution, the holders of such Guarantor Senior Indebtedness and
other Indebtedness of such Subsidiary Guarantor, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article XI.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a Person representing himself to be a holder of Guarantor Senior
Indebtedness (or a trustee or agent on behalf of such holder) to establish
that such notice has been given by a holder of such Guarantor Senior
Indebtedness (or a trustee or agent on behalf of any such holder). In the
event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of such
Guarantor Senior Indebtedness to participate in any payment or distribution
pursuant to this Article XI, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
such Guarantor Senior Indebtedness held by such Person, the extent to which
such Person is entitled to participate in such payment or distribution and
any other facts pertinent to the rights of such Person under this Article XI,
and if such evidence is not furnished, the Trustee may defer any payment
which it may be required to make for the benefit of such Person pursuant to
the terms of this Indenture pending judicial determination as to the rights
of such Person to receive such payment.
SECTION 11.17. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the
provisions of this Article XI or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts
that would prohibit the making of any payment or distribution by the Trustee,
and the Trustee and the Paying Agent may continue to make payments on the
Notes, unless the Trustee shall have received at its Corporate Trust Office
at least five Business Days prior to the date of such payment written notice
of facts that would cause the payment of any Obligations with respect to any
Subsidiary Guarantee to violate this Article XI. Only the holders of
Designated Guarantor Senior Indebtedness or a Representative thereof may give
the notice. Nothing in this Article XI shall impair the claims of, or
payments to, the Trustee under or pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Guarantor
Senior Indebtedness with the same rights it would have if it were not
Trustee. Any Paying Agent may do the same with like rights.
SECTION 11.18. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a
Note by the Holder's acceptance thereof authorizes and directs the Trustee on
the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article XI, and appoints the
Trustee to act as the Holder's attorney-in-fact for any and all such
purposes. If the Trustee does not file a proper proof of claim or proof of
debt in the form required in any
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judicial proceeding relative to any Subsidiary Guarantor (or any other
obligor upon the Notes), its creditors or its property at least 30 days
before the expiration of the time to file such claim, any Representative is
hereby authorized to file an appropriate claim for and on behalf of the
Holders of the Notes.
SECTION 11.19. AMENDMENTS. The provisions of this Article XI shall not
be amended or modified in a manner materially adverse to the Holders of
Guarantor Senior Indebtedness without the written consent of the holders of
all Designated Guarantor Senior Indebtedness.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS. If and to the extent that
any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by, or with another provision (an "incorporated provision")
included in this Indenture by operation of, Sections 310 to 318, inclusive,
of the Trust Indenture Act, such imposed duties or incorporated provision
shall control.
SECTION 12.02. NOTICES. Any notice or communication shall be in writing
and delivered in person or mailed by first class mail, postage prepaid,
addressed as follows: if to the Company or any Subsidiary Guarantor: 400
West Illinois, 10th Floor, Midland, Texas 79701, Attention: Chief Financial
Officer; if to the Trustee: State Street Bank and Trust Company, Two
International Place, 4th Floor, Boston, Massachusetts 02110, Attention:
Corporate Trust Department.
The Company, the Subsidiary Guarantors or the Trustee, by notice to the
other, may designate additional or different addresses for subsequent notices
or communications. Any notice or communication mailed to a Holder shall be
sent to the Holder by first class mail, postage prepaid, at the Holder's
address as it appears in the Security Register and shall be duly given if so
sent within the time prescribed. Failure to mail a notice or communication to
a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders. If a notice or communication is mailed to the Company, the
Trustee or a Holder in the manner provided above, it is duly given, whether
or not the addressee receives it. In case by reason of the suspension of
regular mail service or by reason of any other cause it shall be
impracticable to give notice by mail to Holders, then such notification as
shall be made with the approval of the Trustee shall constitute a sufficient
notification for every purpose hereunder.
SECTION 12.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon
any request or application by the Company or any Subsidiary Guarantor to the
Trustee to take or refrain from taking any action under this Indenture, the
Company or such Subsidiary Guarantor shall furnish to the Trustee: (a) an
Officers' Certificate stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; and
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(b) an Opinion of Counsel stating that, in the opinion of such counsel, all
such conditions precedent have been complied with.
SECTION 12.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture (other than pursuant to Section 4.19
hereof) shall include: (a) a statement that the individual making such
certificate or opinion has read such covenant or condition; (b) a brief
statement as to the nature and scope of the examination or investigation upon
which the statements or opinions contained in such certificate or opinion are
based; (c) a statement that, in the opinion of such individual, such person
has made such examination or investigation as is necessary to enable such
person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (d) a statement as to whether or not,
in the opinion of such individual, such covenant or condition has been
complied with.
SECTION 12.05. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The
Trustee may make reasonable rules for action by or a meeting of Holders, and
any Registrar and Paying Agent may make reasonable rules for their functions;
provided that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION 12.06. PAYMENTS ON BUSINESS DAYS. If a payment hereunder is
scheduled to be made on a date that is not a Business Day, payment shall be
made on the next succeeding day that is a Business Day, and no interest shall
accrue with respect to that payment during the intervening period. If a
regular record date is a date that is not a Business Day, such record date
shall not be affected.
SECTION 12.07. GOVERNING LAW. THIS INDENTURE AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 12.08. NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of the Company or any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes or this Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation, solely by reason of its status as a director, officer, employee,
incorporator or stockholder of the Company or any Subsidiary Guarantor. By
accepting a Note, each Holder waives and releases all such liability (but
only such liability) as part of the consideration for issuance of such Note
to such Holder.
SECTION 12.09. SUCCESSORS. All agreements of the Company and the
Subsidiary Guarantors in this Indenture and the Notes shall bind its
successors and assigns whether so expressed or not. All agreements of the
Trustee in this Indenture shall bind its successors and assigns whether so
expressed or not.
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SECTION 12.10. COUNTERPARTS. This Indenture may be executed in any
number of counterparts and by the parties thereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
SECTION 12.11. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any
of the terms or provisions hereof.
SECTION 12.12. SEVERABILITY. In case any provision in this Indenture
or in the Notes shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
SECTION 12.13. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company and the Subsidiary Guarantors will execute and deliver
such further instruments and do such further acts as may be reasonably
necessary or proper to carry out more effectively the purposes of this
Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
COSTILLA ENERGY, INC.
By
-----------------------------------
Name:
Title:
STATE STREET BANK AND TRUST, as Trustee
By
-----------------------------------
Name:
Title:
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SUBSIDIARY GUARANTORS:
COSTILLA PETROLEUM CORPORATION
COSTILLA PIPELINE COMPANY
STATEWIDE MINERALS CORPORATION
VALLEY GATHERING COMPANY
By
-----------------------------------
Name:
Title:
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STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the __ day of ______________, 1996, before me personally came
_______________________, to me known, who, being by me duly sworn, did depose
and say that he is ______________________ of Costilla Energy, Inc., one of
the corporations described in and which executed the foregoing instrument,
and that he signed his name thereto by authority of the Board of Directors of
said corporation.
--------------------------------------
Notary Public
State of New York
My commission expires
-----
[Seal]
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of State Street Bank and
Trust Company, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
--------------------------------------
Notary Public
State of New York
My commission expires
----------------
[Seal]
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<PAGE>
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of Costilla Petroleum
Corporation, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
-----------------------------------------
Notary Public
State of New York
My commission expires
-----------
[Seal]
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of Costilla Pipeline
Company, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
-----------------------------------------
Notary Public
State of New York
My commission expires
-----------
[Seal]
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STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of Statewide Minerals
Corporation, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
-----------------------------------------
Notary Public
State of New York
My commission expires
-----------
[Seal]
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of Valley Gathering
Company, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
-----------------------------------------
Notary Public
State of New York
My commission expires
-----------
[Seal]
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<PAGE>
EXHIBIT A
FORM OF FACE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
No. ______ CUSIP No. ___________
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO COSTILLA ENERGY, INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, AND
NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN THIS
GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS OF
___________________, 1996, BETWEEN COSTILLA ENERGY, INC., CERTAIN
SUBSIDIARY GUARANTORS, AND THE TRUSTEE NAMED THEREIN, PURSUANT TO WHICH
THIS NOTE WAS ISSUED.
<PAGE>
GLOBAL NOTE
REPRESENTING ____% SENIOR SUBORDINATED NOTES DUE 2006
Costilla Energy, Inc., a Delaware corporation, for value received,
hereby promises to pay to CEDE & CO., or its registered assigns, the
principal sum indicated on Schedule A hereof, on __________________, 2006.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
under its corporate seal.
COSTILLA ENERGY, INC.
By:
---------------------------------
Name:
Title:
[Corporate Seal]
Attest:
By:
---------------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By:
----------------------------------
Authorized Signatory
A-2
<PAGE>
FORM OF REVERSE SIDE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
GLOBAL NOTE
REPRESENTING ___% SENIOR SUBORDINATED NOTES DUE 2006
1. INDENTURE.
This Note is one of a duly authorized issue of debt securities of
the Company (as defined below) designated as its "____% Senior Subordinated
Notes due 2006" (herein called the "Notes") limited in aggregate principal
amount to $100,000,000, issued under an indenture dated as of _______________,
1996 (as amended or supplemented from time to time, the "Indenture") between
the Company, certain subsidiaries of the Company (the "Subsidiary
Guarantors") and State Street Bank and Trust Company, as trustee (the
"Trustee," which term includes any successor Trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the
Company, the Subsidiary Guarantors, the Trustee and each Holder of Notes and
of the terms upon which the Notes are, and are to be, authenticated and
delivered. The summary of the terms of this Note contained herein does not
purport to be complete and is qualified by reference to the Indenture. All
terms used in this Note which are not defined herein shall have the meanings
assigned to them in the Indenture.
The Indenture restricts, among other things, the Company's and its
Subsidiaries' ability to incur additional indebtedness and issue preferred
stock, incur liens to secure PARI PASSU or subordinated indebtedness, pay
dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior
Indebtedness and senior in right of payment to the Notes, merge or
consolidate with any other person, sell stock of Subsidiaries or sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of
the assets of the Company. The Indenture permits, under certain
circumstances, Subsidiaries of the Company to be deemed Unrestricted
Subsidiaries and thus not subject to the restrictions of the Indenture.
2. PRINCIPAL AND INTEREST.
Costilla Energy, Inc., a Delaware corporation (such corporation, and
its successors and assigns under the Indenture hereinafter referred to, being
herein called the "Company"), promises to pay the principal amount set forth
on Schedule A of this Note to the Holder hereof on ___________, 2006.
The Company shall pay interest on this Note at a rate of ____%, per
annum semiannually in arrears on ________________ __, and ________________
__, of each year, commencing on ____________ __, 1997, to the Holder hereof
until the principal amount hereof is paid or duly provided for. Interest
shall accrue from __________________, 1996 or from the most
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<PAGE>
recent Interest Payment Date thereafter to which interest has been paid or
duly provided for. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain
exceptions provided in the Indenture, be paid to the Person in whose name
this Note (or the Note in exchange or substitution for which this Note was
issued) is registered at the close of business on the Record Date for
interest payable on such Interest Payment Date. The Record Date for any
interest payment is the close of business on ______________ __, or
______________ __, as the case may be, whether or not a Business Day,
immediately preceding the Interest Payment Date on which such interest is
payable. Any such interest not so punctually paid or duly provided for
("Defaulted Interest") shall forthwith cease to be payable to the Holder on
such Record Date and shall be paid as provided in Section 2.11 of the
Indenture. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date.
If an Interest Payment Date falls on a day that is not a Business Day, the
interest payment to be made on such Interest Payment Date will be made on the
next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a
result of such delayed payment.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
3. METHOD OF PAYMENT.
The Company, through the Paying Agent, shall pay interest on this
Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments.
The Company will pay principal, premium, if any, and interest in money of the
United States of America that at the time of payment is legal tender for
payment of all debts public and private. Principal, premium, if any, and
interest will be payable at the office of the Paying Agent but, at the option
of the Company, interest may be paid by check mailed to the registered
Holders at their registered addresses; PROVIDED that all payments with
respect to Notes the Holders of which have given wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof.
4. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as Paying Agent and Registrar under
the Indenture. The Company may, upon written notice to the Trustee, appoint
and change any Paying Agent or Registrar. The Company or any of its
subsidiaries may act as Paying Agent or Registrar.
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<PAGE>
5. OPTIONAL REDEMPTION.
The Notes may not be redeemed at the Company's option prior to
_____, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 calendar
days' nor more than 60 calendar days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon (if any) to the applicable Redemption Date, if
redeemed during the twelve-month period beginning on _________ of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2001 _______%
2002 _______%
2003 _______%
2004 and thereafter 100.000%
Notwithstanding the foregoing, at any time on or before
_____________, 1999, the Company may (but shall not have the obligation to)
redeem up to 30% of the original aggregate principal amount of the Notes at a
redemption price of _______% of the principal amount thereof, plus accrued
and unpaid interest thereon to the Redemption Date, with the net proceeds of
an Equity Offering made by the Company; PROVIDED that at least 70% of the
aggregate principal amount of Notes originally issued remain outstanding
immediately after the occurrence of such redemption; and PROVIDED, FURTHER,
that such redemption shall occur within 75 days of the date of the closing of
such Equity Offering.
The Notes are not subject to any sinking fund.
6. NOTICE OF REDEMPTION.
At least 30 calendar days but not more than 60 calendar days before
a Redemption Date, the Company will send a notice of redemption, first-class
mail, postage prepaid, to Holders of Notes to be redeemed at the addresses of
such Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the
Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect
to any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest will be paid on such Interest Payment
Date to the Holder of the Note at the close of business on such Record Date.
If money in an amount sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent on or before the applicable Redemption Date and certain other
conditions are satisfied, interest on the Notes or portions thereof to be
redeemed on the applicable Redemption Date will cease to accrue.
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<PAGE>
7. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes,
in whole or in part, in a principal amount that is an integral multiple of
$1,000, pursuant to a Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest thereon to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company
shall send, or cause to be sent, by first-class mail, postage prepaid, a
notice regarding the Change of Control Offer to each Holder of Notes. The
Holder of this Note may elect to have this Note or a portion hereof in an
authorized denomination purchased by completing the form entitled "Option of
Holder to Elect Purchase" appearing below and tendering this Note pursuant to
the Change of Control Offer. Unless the Company defaults in the payment of
the Change of Control Purchase Price with respect thereto, all Notes or
portions thereof accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest from and after the Change of Control Payment
Date.
8. REPURCHASE AT THE OPTION OF HOLDERS UPON ASSET SALE.
If at any time the Company or any Subsidiary engages in any Asset
Sale, the Company shall, within 30 calendar days of the date the amount of
Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds
to make an offer to purchase from all Holders, on a pro rata basis, Notes in
an aggregate principal amount equal to the maximum principal amount that may
be purchased out of the then-existing Excess Proceeds, at a purchase price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the Asset Sale Payment Date. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale
Purchase Price for accepted Notes), any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5.0 million, the Company shall send, or cause to be sent, by
first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or
a portion hereof in an authorized denomination purchased by completing the
form entitled "Option of Holder to Elect Purchase" appearing below and
tendering this Note pursuant to the Asset Sale Offer. Unless the Company
defaults in the payment of the Asset Sale Purchase Price with respect
thereto, all Notes or portions thereof selected for payment pursuant to the
Asset Sale Offer will cease to accrue interest from and after the Asset Sale
Payment Date.
9. THE GLOBAL NOTE.
So long as this Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under the
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<PAGE>
Indenture with respect to this Global Note held on their behalf by the
Depositary or the Trustee as its custodian, and the Depositary may be treated
by the Company, the Trustee and any agent of the Company or the Trustee as
the absolute owner of this Global Note for all purposes. Notwithstanding the
foregoing, nothing herein shall (i) prevent the Company, the Trustee or any
agent of the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or
(ii) impair, as between the Depositary and its Agent Members, the operation
of customary practices governing the exercise of the rights of a Holder of
Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which
a Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a
Change of Control Offer, an Asset Sale Offer or an exchange for Certificated
Notes, this Global Note is redeemed, repurchased or exchanged in part, this
Global Note shall be surrendered by the Holder thereof to the Trustee who
shall cause an adjustment to be made to Schedule A hereof so that the
principal amount of this Global Note will be equal to the portion not
redeemed, repurchased or exchanged and shall thereafter return this Global
Note to such Holder; PROVIDED that this Global Note shall be in a principal
amount of $1,000 or an integral multiple of $1,000.
10. TRANSFER AND EXCHANGE.
The Holder of this Global Note shall, by acceptance of this Global
Note, agree that transfers of beneficial interests in this Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in whole
and not in part, to the Depositary, its successors, and their respective
nominees. Interests of beneficial owners in this Global Note shall be
transferred in accordance with the rules and procedures of the Depositary (or
its successors).
This Global Note shall be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it
is unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange
Act is not able to be appointed by the Company within 90 calendar days or (b)
the Depositary is at any time unwilling or unable to continue as Depositary
and a successor to the Depositary is not able to be appointed by the Company
within 90 calendar days. If an Event of Default occurs and is continuing,
the Company shall, at the request of the Holder hereof, exchange all or part
of this Global Note for one or more Certificated Notes; PROVIDED that the
principal amount of each of such Certificated Notes and this Global Note,
after such exchange, shall be $1,000 or an integral multiple
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<PAGE>
thereof. Whenever this Global Note is exchanged as a whole for one or more
Certificated Notes, it shall be surrendered by the Holder to the Trustee for
cancellation. Whenever this Global Note is exchanged in part for one or more
Certificated Notes, it shall be surrendered by the Holder to the Trustee and
the Trustee shall make the appropriate notations hereon pursuant to Section
2.05(c) of the Indenture. All Certificated Notes issued in exchange for this
Global Note or any portion hereof shall be registered in such names, and
delivered, as the Depositary shall instruct the Trustee.
The Holder of this Note shall have the right to obtain from the
Company the information specified in Section 4.17 of the Indenture.
11. DENOMINATIONS.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
12. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the
money back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment unless
such abandoned property law designates another Person.
13. DISCHARGE AND DEFEASANCE.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the
Company irrevocably deposits with the Trustee money or U.S. Government
Obligations for the payment of principal, premium, if any, and interest on
the Notes to redemption or maturity, as the case may be.
14. AMENDMENT, WAIVER.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders
of at least a majority in principal amount of the outstanding Notes and (ii)
any past Default and its consequences may be waived with the written consent
of the Holders of at least a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Holder of Notes, the Company, the Subsidiary Guarantors and
the Trustee may amend the Indenture or the Notes (i) to evidence the
succession of another Person to (A) the Company and the assumption by such
successor of the covenants of the Company under the Indenture and contained
in the Notes or (B) a Subsidiary Guarantor and the assumption by such
successor of the covenants of such Subsidiary Guarantor under the Indenture
and contained in its Subsidiary Guarantee; (ii) to add additional covenants
or to surrender rights and powers conferred on the Company or any Subsidiary
Guarantor; (iii) to add any
A-8
<PAGE>
additional Events of Default; (iv) to provide for uncertificated Notes in
addition to or in place of Certificated Notes; (v) to evidence and provide
for the acceptance of appointment under the Indenture of a successor Trustee;
(vi) to secure the Notes; (vii) to cure any ambiguity in the Indenture, to
correct or supplement any provision in the Indenture which may be
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Indenture, PROVIDED
that such actions shall not adversely affect the interests of the Holders in
any material respect; (viii) to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act; or (ix) to release any Subsidiary Guarantor
pursuant to the Indenture.
15. DEFAULTS AND REMEDIES.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being-immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Notes unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of
the Notes may direct the Trustee in its exercise of any trust or power under
the Indenture. The Holders of a majority in principal amount of the then
outstanding Notes, by written notice to the Trustee, may rescind any
declaration of acceleration and its consequences if the rescission would not
conflict with any judgment or decree, and if all Events of Default have been
cured or waived except nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
16. SUBORDINATION.
The payment of principal of, premium, if any, and interest on the
Notes will be subordinated in right of payment to the prior payment in full
of Senior Indebtedness as set forth in Article X of the Indenture.
17. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture, the payment
of principal of, premium, if any, and interest on the Notes will be
guaranteed by each Subsidiary Guarantor and all additional Subsidiary
Guarantors. The obligations of the Subsidiary Guarantors to the Holders or
the Trustee pursuant to the Subsidiary Guarantees and the Indenture will be
subordinated in right of payment to the prior payment in full of Guarantor
Senior Indebtedness as set forth in Article XI of the Indenture.
A-9
<PAGE>
18. INDIVIDUAL RIGHTS OF TRUSTEE.
Subject to certain limitations imposed by the Trust Indenture Act,
the Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it
were not Trustee, Paying Agent or Registrar, as the case may be, under the
Indenture.
19. NO RECOURSE AGAINST CERTAIN OTHERS.
No director, officer, employee, incorporator or stockholder of the
Company or any Subsidiary Guarantor, as such, shall have any liability for
any obligations of the Company or such Subsidiary Guarantor under the Notes
or the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation, solely by reason of its status as a
director, officer, employee, incorporator or stockholder of the Company or
any Subsidiary Guarantor. By accepting a Note, each Holder waives and
releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
20. GOVERNING LAW.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
Costilla Energy, Inc.
400 West Illinois, 10th Floor
Midland, Texas 79701
Attention: Chief Financial Officer
A-10
<PAGE>
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at maturity of this Note shall be $100,000,000.
The following decreases/increase in the principal amount at maturity of this
Note have been made:
TOTAL PRINCIPAL
AMOUNT AT
DECREASE IN INCREASE IN MATURITY
DATE OF PRINCIPAL PRINCIPAL FOLLOWING SUCH NOTATION MADE
DECREASE/ AMOUNT AT AMOUNT AT DECREASE/ BY OR ON BEHALF
INCREASE MATURITY MATURITY INCREASE OF TRUSTEE
- --------- ----------- ----------- --------------- ---------------
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
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<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
_______________________________
_____________________________________________________________________________
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does
hereby irrevocably constitute and appoint ______________________________
Attorney to transfer this Note on the Security Register, with full power of
substitution.
Dated:________________________
_______________________________ ______________________________________
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program:
NOTICE: The signature to the foregoing Assignment must correspond to the
Name as written upon the face of this Note in every particular, without
alteration or any change whatsoever.
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<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
_______________________________
_____________________________________________________________________________
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does
hereby irrevocably constitute and appoint ______________________________
Attorney to transfer this Note on the Security Register, with full power of
substitution.
Dated:________________________
_______________________________ ______________________________________
Signature of Holder Signature Guaranteed by an
institution member of the
Signature Guaranty Medallion
Program
NOTICE: The signature to the foregoing Assignment must correspond to the
Name as written upon the face of this Note in every particular, without
alteration or any change whatsoever.
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral multiple
thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 101% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08 of
the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral multiple
thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 100% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Asset Sale Payment Date.
Dated:________________________
_______________________________ ______________________________________
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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<PAGE>
EXHIBIT B
FORM OF FACE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
No._________ CUSIP No. ___________
___% SENIOR SUBORDINATED NOTE DUE 2006
Costilla Energy, Inc., a Delaware corporation, for value received, hereby
promises to pay to _________________ or its registered assigns, the principal
amount of _____________ on ____________, 2006.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
under its corporate seal.
COSTILLA ENERGY, INC.
By:
----------------------------------
Name:
Title:
[Corporate Seal]
Attest:
By:
---------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By:
---------------------------
Authorized Signatory
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<PAGE>
FORM OF REVERSE SIDE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
____% SENIOR SUBORDINATED NOTE DUE 2006
1. INDENTURE.
This Note is one of a duly authorized issue of debt securities of
the Company (as defined below) designated as its "____% Senior Subordinated
Notes due 2006" (herein called the "Notes") limited in aggregate principal
amount to $100,000,000, issued under an indenture dated as of ________________,
1996 (as amended or supplemented from time to time, the "Indenture") between
the Company, certain subsidiaries of the Company (the "Subsidiary Guarantors")
and State Street Bank and Trust Company, as trustee (the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Subsidiary
Guarantors, the Trustee and each Holder of Notes and of the terms upon which
the Notes are, and are to be, authenticated and delivered. The summary of the
terms of this Note contained herein does not purport to be complete and is
qualified by reference to the Indenture. All terms used in this Note which are
not defined herein shall have the meanings assigned to them in the Indenture.
The Indenture restricts, among other things, the Company's and its
Subsidiaries' ability to incur additional indebtedness and issue preferred
stock, incur liens to secure PARI PASSU or subordinated indebtedness, pay
dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior Indebtedness
and senior in right of payment to the Notes, merge or consolidate with any
other person, sell stock of Subsidiaries or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company.
The Indenture permits, under certain circumstances, Subsidiaries of the Company
to be deemed Unrestricted Subsidiaries and thus not subject to the restrictions
of the Indenture.
2. PRINCIPAL AND INTEREST.
Costilla Energy, Inc., a Delaware corporation (such corporation, and
its successors and assigns under the Indenture hereinafter referred to, being
herein called the "Company"), promises to pay the principal amount set forth on
the face hereof to the Holder hereof on __________________, 2006.
The Company shall pay interest on this Note at a rate of ____%, per
annum semiannually in arrears on _______________ __, and _____________ __ of
each year, commencing on ____________ __, 1997, to the Holder hereof until
the principal amount hereof is paid or duly provided for. Interest shall
accrue from _________________, 1996 or from the most recent Interest Payment
Date thereafter to which interest has been paid or duly provided for. The
interest so
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<PAGE>
payable, and punctually paid or duly provided for, on any Interest Payment
Date will, subject to certain exceptions provided in the Indenture, be paid
to the Person in whose name this Note (or the Note in exchange or substitution
for which this Note was issued) is registered at the close of business on the
Record Date for interest payable on such Interest Payment Date. The Record
Date for any interest payment is the close of business on _________ __, or
__________ __, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any
such interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date
will include interest accrued through the day before such Interest Payment
Date. If an Interest Payment Date falls on a day that is not a Business Day,
the interest payment to be made on such Interest Payment Date will be made on
the next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a
result of such delayed payment.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such -overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
3. METHOD OF PAYMENT.
The Company, through the Paying Agent, shall pay interest on this
Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments. The
Company will pay principal, premium, if any, and interest in money of the United
States of America that at the time of payment is legal tender for payment of all
debts public and private. Principal, premium, if any, and interest will be
payable at the office of the Paying Agent but, at the option of the Company,
interest may be paid by check mailed to the registered Holders at their
registered addresses; provided that all payments with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof.
4. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as Paying Agent and Registrar under
the Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries
may act as Paying Agent or Registrar.
B-4
<PAGE>
5. OPTIONAL REDEMPTION.
The Notes may not be redeemed at the Company's option prior to
2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 calendar days' nor
more than 60 calendar days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon (if any) to the applicable Redemption Date, if redeemed
during the twelve-month period beginning on ______________ of the years
indicated below:
Year Percentage
2001 _______%
2002 _______%
2003 _______%
2004 and thereafter 100.000%
Notwithstanding the foregoing, at any time on or before _____________,
1999, the Company may (but shall not have the obligation to) redeem up to 30%
of the original aggregate principal amount of the Notes at a redemption price
of _____% of the principal amount thereof, plus accrued and unpaid interest
thereon to the Redemption Date, with the net proceeds of an Equity Offering
made by the Company; provided that at least 70% of the aggregate principal
amount of Notes originally issued remain outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption
shall occur within 75 days of the date of the closing of such Equity Offering.
The Notes are not subject to any sinking fund.
6. NOTICE OF REDEMPTION.
At least 30 calendar days but not more than 60 calendar days before
a Redemption Date, the Company will send a notice of redemption, first-class
mail, postage prepaid, to Holders of Notes to be redeemed at the addresses of
such Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the
Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect
to any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest will be paid on such Interest Payment
Date to the Holder of the Note at the close of business on such Record Date.
If money in an amount sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent on or before the applicable Redemption Date and certain other
conditions are satisfied, interest on the Notes or portions thereof to be
redeemed on the applicable Redemption Date will cease to accrue.
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<PAGE>
7. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes,
in whole or in part, in a principal amount that is an integral multiple of
$1,000, pursuant to a Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest thereon to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the
Company shall send, or cause to be sent, by first-class mail, postage
prepaid, a notice regarding the Change of Control Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion
hereof in an authorized denomination purchased by completing the form
entitled "Option of Holder to Elect Purchase" appearing below and tendering
this Note pursuant to the Change of Control Offer. Unless the Company
defaults in the payment of the Change of Control Purchase Price with respect
thereto, all Notes or portions thereof accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest from and after the
Change of Control Payment Date.
8. REPURCHASE AT THE OPTION OF HOLDERS UPON ASSET SALE.
If at any time the Company or any Subsidiary engages in any Asset
Sale, the Company shall, within 30 calendar days of the date the amount of
Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds
to make an offer to purchase from all Holders, on a pro rata basis, Notes in
an aggregate principal amount equal to the maximum principal amount that may
be purchased out of the then-existing Excess Proceeds, at a purchase price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the Asset Sale Payment Date. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale
Purchase Price for accepted Notes), any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5.0 million, the Company shall send, or cause to be sent, by
first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or
a portion hereof in an authorized denomination purchased by completing the
form entitled "Option of Holder to Elect Purchase" appearing below and
tendering this Note pursuant to the Asset Sale Offer. Unless the Company
defaults in the payment of the Asset Sale Purchase Price with respect
thereto, all Notes or portions thereof selected for payment pursuant to the
Asset Sale Offer will cease to accrue interest from and after the Asset Sale
Payment Date.
9. TRANSFER AND EXCHANGE.
A Holder may transfer a Note only upon the surrender of such Note
for registration of transfer. No such transfer shall be effected until, and
such transferee shall succeed to the rights
B-6
<PAGE>
of a Holder only upon, final acceptance and registration of the transfer in
the Security Register by the Registrar. When Notes are presented to the
Registrar with a request to register the transfer of, or to exchange, such
Notes, the Registrar shall register the transfer or make such exchange as
requested if its requirements for such transactions and any applicable
requirements hereunder are satisfied.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer of Notes.
The Holder of this Note shall have the right to obtain from the
Company the information specified in Section 4.17 of the Indenture.
10. DENOMINATIONS.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
11. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the
money back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment unless
such abandoned property law designates another Person.
12. DISCHARGE AND DEFEASANCE.
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Notes and the Indenture if
the Company irrevocably deposits with the Trustee money or U.S. Government
Obligations for the payment of principal, premium, if any, and interest on
the Notes to redemption or maturity, as the case may be.
13. AMENDMENT, WAIVER.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders
of at least a majority in principal amount of the outstanding Notes and (ii)
any past Default and its consequences may be waived with the written consent
of the Holders of at least a majority in principal amount of the outstanding
Notes. Subject to certain exceptions set forth in the Indenture, without the
consent of any Holder of Notes, the Company, the Subsidiary Guarantors and
the Trustee may amend the Indenture or the Notes (i) to evidence the
succession of another Person to (A) the Company and the assumption by such
successor of the covenants of the Company under the Indenture and contained
in the Notes or (B) a Subsidiary Guarantor and the assumption by such
successor of the covenants of such Subsidiary Guarantor under
B-7
<PAGE>
the Indenture and contained in its Subsidiary Guarantee; (ii) to add
additional covenants or to surrender rights and powers conferred on the
Company or any Subsidiary Guarantor; (iii) to add any additional Events of
Default; (iv) to provide for uncertificated Notes in addition to or in place
of Certificated Notes; (v) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (vi) to secure the
Notes; (vii) to cure any ambiguity in the Indenture, to correct or supplement
any provision in the Indenture which may be inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Indenture, PROVIDED that such actions shall not
adversely affect the interests of the Holders in any material respect; (viii)
to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act; or
(ix) to release any Subsidiary Guarantor pursuant to the Indenture.
14. DEFAULTS AND REMEDIES.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Notes unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of
the Notes may direct the Trustee in its exercise of any trust or power under
the Indenture. The Holders of a majority in principal amount of the then
outstanding Notes, by written notice to the Trustee, may rescind any
declaration of acceleration and its consequences if the rescission would not
conflict with any judgment or decree, and if all Events of Default have been
cured or waived except nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
15. SUBORDINATION.
The payment of principal of, premium, if any, and interest on the
Notes will be subordinated in right of payment to the prior payment in full
of Senior Indebtedness as set forth in Article X of the Indenture.
16. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture, the payment
of principal of, premium, if any, and interest on the Notes will be
guaranteed by each Subsidiary Guarantor and all additional Subsidiary
Guarantors. The obligations of the Subsidiary Guarantors to the Holders or
the Trustee pursuant to the Subsidiary Guarantees and the Indenture will be
subordinated in right of payment to the prior payment in full of Guarantor
Senior Indebtedness as set forth in Article XI of the Indenture.
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<PAGE>
17. INDIVIDUAL RIGHTS OF TRUSTEE.
Subject to certain limitations imposed by the Trust Indenture Act,
the Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it
were not Trustee, Paying Agent or Registrar, as the case may be, under the
Indenture.
18. NO RECOURSE AGAINST CERTAIN OTHERS.
No director, officer, employee, incorporator or stockholder of the
Company or any Subsidiary Guarantor, as such, shall have any liability for
any obligations of the Company or such Subsidiary Guarantor under the Notes
or the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation, solely by reason of its status as a
director, officer, employee, incorporator or stockholder of the Company or
any Subsidiary Guarantor. By accepting a Note, each Holder waives and
releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
19. GOVERNING LAW.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
Costilla Energy, Inc.
400 West Illinois, 10th Floor
Midland, Texas 79701
Attention: Chief Financial Officer
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<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
- -------------------------
|
- -----------------------------------------------------------------------------
(Please print name and address of transferee)
- -----------------------------------------------------------------------------
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ______________________________ Attorney to
transfer this Note on the Security Register, with full power of substitution.
Dated:
------------------------
- --------------------------------- ----------------------------------------
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing Assignment must correspond to the Name
as written upon the face of this Note in every particular, without alteration
or any change whatsoever.
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant to
Section 4.07 of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 101% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 100% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Asset Sale Payment Date.
Dated:
-------------------
- -------------------------------- ---------------------------------------
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Note in every particular, without alteration or any change
whatsoever.
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<PAGE>
EXHIBIT 10.2
LEASE AGREEMENT
STATE OF TEXAS
COUNTY OF MIDLAND
THIS LEASE AGREEMENT made and entered into this the 12th day of Jan., 1996,
between INDEPENDENCE PLAZA, LTD., a Texas Limited Partnership, (hereinafter
called "Landlord"), whose address for purposes hereof is 400 W. Illinois,
Midland, Texas 79701, and COSTILLA ENERGY, a Texas Corporation, (hereinafter
called "Tenant").
WITNESSETH:
Section 1. Premises
- --------------------
(I) Subject to and upon the terms, provisions, and conditions hereinafter
set forth, and each in consideration of the duties, covenants, and obligations
of the other hereunder, Landlord does hereby lease, demise, and let to Tenant,
and the Tenant does hereby lease from Landlord, those certain premises being
approximately 22,500 square feet of net rentable area (the "Leased Premises") on
the 10TH Floor, Suite 1000, and the 11th Floor, Suite 1180, of the building
known as Independence Plaza, at 400 W. Illinois, Midland, Texas 79701, (The
"Building"), located on real property more particularly described on Exhibit A
attached hereto and made a part hereof for all purposes.
(II) The term "Net Rentable Area" shall refer to (a) in the case of a
single tenancy floor, the entire area bounded by the outside surfaces of the
four exterior glass walls (or the outside surface of the permanent exterior
wall where there is no glass) of the Building on such floor less the area
contained within the exterior walls of the building stairs, fire towers,
vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts plus all
the area on any single tenant floor that is used for elevator lobbies,
corridors, special stairways, restrooms, mechanical rooms, electrical rooms,
telephone and janitor closets, and all vertical penetrations that are included
for the special use of Tenant, and columns and other structural portions and/or
(b) in the case of a floor to be occupied by more than one (1) tenant, the
total of (i) the entire area included within the Leased Premises covered by
such lease, being the area bounded by the inside surface of any exterior glass
walls (or the inside surface of the permanent exterior wall where there is no
glass) of the Building bounding such Leased Premises, the exterior of all
walls separating such Leased Premises from any public corridors or other
public areas on such floor and the centerline of all walls separating such
Leased Premises from other areas leased or to be leased to other tenants on such
floor and (ii) a pro rata portion of the area covered by the elevator lobbies,
corridors, restrooms, mechanical rooms, electrical rooms, telephone and janitor
closets situated on such floor or other floors which may service such single
tenant floors. The Net Rentable Area for the entire Building shall be deemed to
be 153,400 square feet for the purposes of the Lease.
(III) The Net Rentable Area contained within the Leased Premises shall be
confirmed by an architect upon completion of Tenant Improvements and the Net
Rentable Area for the Leased Premises shall be amended accordingly on the basis
of the foregoing definition. The Leased Premises are more particularly
designated on the floor plan of such Leased Premises attached hereto as Exhibit
B, attached hereto and made a part hereof for all purposes.
Section 2. Term
- ----------------
Subject to and upon the terms and conditions set forth herein, or in any exhibit
or addendum hereto, this Lease shall commence on the 1st day of April, 1996,
(the "Commencement Date"), and shall end (unless sooner terminated) on the 31st
day of March, 2006.
Section 3. Base Rental
- -----------------------
(I) For the first five (5) annual periods of the Lease Term, Tenant hereby
agrees to pay to Landlord, without setoff or reduction whatsoever, a base annual
rental ("Base Rental") of $135,000.00, in monthly installments of $11,250.00.
For the subsequent five (5) annual periods of the Lease Term, Tenant hereby
agrees to pay Landlord $180,000.00, in monthly installments of $15,000.00.
Tenant shall also pay, as additional rent, all such other sums of money as shall
become due and payable under this Lease and all such other sums of money payable
as shall sometimes hereinafter collectively be called "Additional Rent." The
nonpayment of Base Rental shall entitle Landlord to exercise all such rights and
remedies as are herein provided. The annual Base Rental, together with any
adjustment or increase thereto then in effect shall be due and payable in
advance in twelve (12) equal installments on the first (1st) day of each
calendar month during the term of this lease at Landlord's address provided
herein (or such other address as may be designated by Landlord or Landlord's
agent in writing from time to time). If the term of this Lease commences on a
day other than the first (1st) day of a month or terminates on a day other than
the last day of a month, then the installments of Base Rental and any
adjustments thereto for such month shall be prorated, based on thirty (30) days
per month, and the installment or installments so prorated shall be paid in
advance.
(II) All past due installments of rent shall bear interest at the annual
rate of 10% or the maximum lawful rate, whichever is lesser, until paid.
Section 4. Base Rental Adjustment
- ----------------------------------
(I) For the purposes of ascertaining the Base Rental Adjustment, the
following terms shall have the following meanings:
1
<PAGE>
(A) "Base Rental Amount" shall mean $6.00 per square foot of Net
Rentable Area per annum, for the first five (5) annual periods, and $8.00 per
rentable square foot per annum for the subsequent five (5) annual periods.
(B) "Estimated Operating Expenses" shall mean Landlord's good faith
projection of Operating expenses for the forthcoming calendar year;
(C) "Tenant's Share" shall mean the ratio determined by dividing the Net
Rentable Area of the Leased Premises by the Net Rentable Area in the Building;
and
(D) "Operating Expenses" shall mean all expenses, costs, and disbursements
(but not replacement of capital investment items nor specific costs especially
billed to and paid by specific tenants) of every kind and nature which Landlord
shall pay or become obligated to pay because of or in connection with the
ownership and operation of the Building, including, but not limited to the
following:
1. Wages, salaries and fees of all personnel directly engaged in the
operation, maintenance, leasing (but not to include third party leasing
commissions), or security of the Building and personnel who may provide traffic
control relating to ingress and egress from the parking areas for the Building
to the adjacent public streets. All taxes, insurance, and benefits relating to
employees providing these services shall also be included.
2. All supplies and material used in the operation and maintenance of the
Building.
3. Costs of all utilities for the building including, but not limited to,
the cost of water, electric energy, natural gas, other power, heating, lighting,
air conditioning, and ventilation.
4. Costs of all maintenance, janitorial, and service agreements for the
Building and the equipment therein, including but not limited to, alarm service,
window cleaning, and elevator maintenance.
5. Cost of all insurance relating to the Building including, but not
limited to, the cost of casualty and comprehensive liability insurance and
Landlord's personal property used in connection therewith.
6. All Taxes, assessments, and other governmental charges, whether
federal, state, county or municipal, and whether they be by taxing districts or
authorities presently taxing the Leased Premises or by others, subsequently
created or otherwise, and any other taxes and assessments attributable to the
Building or its operation. Tenant will be responsible for taxes on its personal
property.
7. Cost of labor in performing repairs and general maintenance in
connection with the Building (excluding repairs and maintenance paid by proceeds
of insurance or by Tenant or other third parties).
8. Amortization of the cost of installation of capital investment items
which have a payout of 5 years or less and which are primarily for the purpose
of reducing operating costs of the Building or which may be required by
governmental authority. All such costs shall be amortized over the reasonable
life of the capital investment items by an additional rent, with the reasonable
life and amortization schedule being determined by Landlord in accordance with
generally accepted accounting principles, but in no event to extend beyond the
reasonable life of the Building.
9. Landlord's reasonable accounting, auditing and legal costs applicable
to the usual and customary operations of the Building.
10. Landlord's actual annual cost for third-party management of the
Building or if Landlord itself manages the Building, the cost Landlord would
incur if it engaged a first-class property management firm located in the
Midland, Texas area to manage on Landlord's behalf.
(II) The Base Rental adjustment shall be calculated in accordance with the
following factors:
(A) Tenant's Base Rental Amount includes a component applicable to
Operating Expenses equal to $4.08 per square foot of Net Rentable Area
(commonly called expense stop).
(B) Prior to Tenant's occupancy of the Leased Premises, Landlord will
provide an updated estimate of Operating Expenses for the year in which
occupancy occurs. If this estimate exceeds $4.08 per square foot of Net
Rentable Area, then Tenant's Base Rental shall be adjusted upward by the amount
of this excess.
(C) Prior to the commencement of each calendar year of Tenant's occupancy,
Landlord shall provide Tenant with its Estimated Operating Expenses for said
calendar year. Tenant shall pay a Base Rental for said calendar year adjusted
upward or downward, as appropriate, by the amount of difference between the
prior calendar year's estimated Operating Expenses and the coming year's
Estimated Operating expenses.
(D) Within 120 days of the conclusion of each calendar year during the
lease term, or as soon thereafter as possible, Landlord shall furnish to Tenant
a statement of Landlord's Operating Expenses for said lease year. A lump suit
payment will be made from Landlord to Tenant or from Tenant to Landlord, as
appropriate, within 30 days of the delivery of such statement equal to the
difference in actual Operating Expenses and Estimated Operating Expenses for the
just-completed year. The effect of this reconciliation payment is that Tenant
will pay during the Term of this Lease Tenant's Proportionate Share of Operating
Expenses increases over the original $4.08 per square foot estimate and no more.
(E) The Proportionate Share to be paid by Tenant shall be fifteen percent
(15%) which is the approximate proportion which the Net Rentable Area contained
in the Leased Premises bears to the Total Net Rentable Area contained in the
Building.
(F) Tenant at its expense shall have the right at all reasonable times,
following prior written notice to Landlord to audit Landlord's books and records
relating to this Lease for any year or years for which Base Rental is adjusted
pursuant to Section 4. (II) hereof with the right to take copies or extras
thereof. In addition, Landlord nay provide such an audit to Tenant as may have
been prepared by a certified public accountant.
(G) If this Lease shall terminate on a day other that the last day of a
calendar year, the amount of any adjustment between Estimated Operating Expenses
and actual operating Expenses shall be prorated on the basis which the number of
days from the commencement of such calendar year to and including such
termination date bears to 360; and any amount payable by Landlord to Tenant or
Tenant to Landlord with respect to such adjustment shall be payable within
thirty (30) days after delivery by Landlord to Tenant of the statement of actual
Operating Expenses with respect to such calendar year.
(H) Notwithstanding any other provisions herein to the contrary, in
determining the amount of the Operating Expenses for the Base Year and for any
subsequent year, if less than 95 percent of the Net Rentable Area for the
Building shall have been occupied by tenants at any time during such year,
Operating Expenses shall be deemed for such year to be an amount equal to the
like expenses which would normally be expected to be incurred
2
<PAGE>
had such occupancy been 95 percent throughout such year and provided with
services as enumerated in Section 6 below.
Nothing contained in this Paragraph II shall be construed at any tine so as
to reduce the monthly installments of Base Rental payable hereunder below the
amount set forth in Section 3 of this Lease.
Section 5. Security Deposit
- ----------------------------
Intentionally omitted.
Section 6. Services to be Furnished by Landlord
- ------------------------------------------------
Landlord shall furnish (at Landlord's cost) to Tenant while occupying the Leased
Premises the following services:
(A) Hot and cold water at those points of supply provided for general use
of the tenants in the Building;
(B) Heat and air conditioning in season, during normal business hours for
the Building at such temperatures and in such amounts as are considered by
Landlord to be standard. Normal business hours are 7:00 am to 6:00 pm, Monday
through Friday and 7:00 am to 1:00 pm on Saturday. Such service at times other
than normal business hours shall be optional on the part of Landlord, provided
that upon reasonable prior notice such service will be provided to Tenant at
Tenant's expense, at an hourly charge of $25.00;
(C) Elevator service in common with other tenants for ingress and egress
to and from the Building;
(D) Janitorial service on a five (5) day week basis provided that Tenant's
floor covering or other improvements are building standard. If Tenant's
improvements require other than standard janitorial services, Tenant may
contract directly with a janitor, approved by Landlord, to clean those above
standard improvements at Tenant's cost.
(E) Electric current (110 volts) for normal office usage in the Leased
Premises and electric lighting service for all public areas and special service
areas of the Building.
Failure by Landlord to any extent to furnish, or any stoppage of, these defined
services, resulting from causes beyond the reasonable control of Landlord, or
from any other cause, shall not render Landlord liable in any respect for
damages to either person or property, nor shall be construed as an eviction of
Tenant, nor work as an abatement of rent, nor relieve Tenant from fulfillment of
any covenant or agreement hereof. Should any equipment or machinery break down,
or for any cause cease to function properly, Landlord shall use reasonable
diligence to repair the same promptly. Tenant shall have no claim for rebate of
rent or damages on account of any interruptions in service occasioned thereby or
resulting therefrom.
Notwithstanding the above, if there is an interruption in electricity, heating,
ventilating and air conditioning or water service to the Leased Premises and
such interruption continues for a period of five (5) consecutive business days
after receipt by Landlord of written notice from Tenant of such interruption,
the Tenant shall be entitled to an abatement of all Rental amounts (Base Rental
and any adjustments to rent) due effective from the time of interruption, which
abatement shall continue until such services are restored.
Section 7. Keys and Locks
- --------------------------
Landlord shall furnish Tenant sixty (60) keys for each corridor door entering
the Leased Premises. Additional keys will be furnished at a charge of $2.00
each by Landlord on receipt of an order signed by Tenant or Tenant's authorized
representative. All such keys shall remain the property of Landlord. No
additional locks shall be allowed on any door of the Leased Premises without
Landlord's written permission, and Tenant shall not make or permit to be made
any duplicate keys, except those furnished by Landlord. Upon termination of
this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises.
Landlord shall not be liable to Tenant for losses due to theft or burglary or
for damages done by unauthorized persons on the Leased Premises, unless such
theft or burglary or damages are caused by Landlord's negligence.
Section 8. Signage
- -------------------
(I) Landlord shall provide and install, at Landlord's cost, all letters or
numbers adjacent to Tenant's main door to corridor and on lobby directory upon
occupancy by Tenant of Leased Premises after Tenant has given written
instructions to Landlord stating exact name Tenant wishes to have appear on
signage, in the standard graphics for the Building. Landlord shall further add
signage or change signage upon written instructions of Tenant to Landlord, if
space allows and at Tenant's cost.
(II) Tenant shall not place signs or any other items on the Leased Premises
which may be visible from outside the Building or visible to the common areas
inside the Building, without first obtaining the written consent of Landlord in
each such instance.
Section 9. Improvements to be Made by Landlord
- -----------------------------------------------
See Exhibit E.
Section 10. Maintenance and Repairs by Landlord
- ------------------------------------------------
Unless otherwise stipulated herein, Landlord shall be required to maintain and
repair only the structural portions of the Building, both exterior and interior,
including the heating, ventilating, and air conditioning systems and equipment,
the public foyers, atriums and lobbies, the corridors, parking areas, elevators,
stairwells and restrooms and all other areas serving more than one tenant of the
Building; provided however that maintenance and repair of
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interior partitioning walls, carpeting and other portions of the Leased Premises
which night otherwise be considered building standard finish shall not be the
obligation of Landlord.
Section 11. Repairs by Tenant
- ------------------------------
Tenant covenants and agrees with Landlord that upon ten (10) days written
notice, at Tenant's own cost and expense, to repair or replace any damage or
injury done to the Leased Premises, Building, or any part thereof, caused by
Tenant or Tenant's agents and employees, along with any such damages done by
Tenant's employees, agents, invitees, or visitors in the Leased Premises, and
such repairs shall restore the Building to the same or as good a condition as it
was in prior to such injury or damage, and shall be effected in compliance with
all building and fire codes and other applicable laws and regulations; provided,
however, if Tenant fails to make such repairs or replacements promptly, Landlord
may, at its option, make such repairs or replacements, and Tenant shall repay
the cost thereof, plus an additional 15% charge to cover overhead, to Landlord
on demand.
SECTION 12. CARE OF THE PREMISES
- ---------------------------------
Tenant covenants and agrees with Landlord to take good care of the Leased
Premises and the fixtures and appurtenances therein and, at Tenant's expense, to
make all non-structural repairs thereto as and when needed to preserve them in
good order and condition except for reasonable wear and tear. Tenant shall not
commit or allow any waste or damage to be committed on any portion of the Leased
Premises, and at the termination of the Lease, by lapse of time or otherwise, to
deliver up the Leased premises to Landlord in as good a condition as at the date
of the commencement of the term of this Lease, ordinary wear and tear excepted,
and upon any termination of this Lease, Landlord shall have the right to re-
enter and resume possession of the Leased Premises.
Section 13. Parking
- --------------------
During the term of this Lease, Tenant shall have, at no additional charge, sixty
(60) covered parking spaces, with initial parking cards provided at no charge.
Replacement of lost parking cards will be at a charge of $10.00 each. Tenant
shall have the non-exclusive use in common with Landlord, other tenants of the
Building and their guests and invitees, of the common automobile parking areas,
driveways, and footways serving the Building, subject to rules and regulations
for the use thereof as prescribed from time to time by Landlord. Landlord shall
not be liable or responsible for any loss of or damage to any car or vehicle or
equipment or other property therein or damage to property or injuries (fatal or
non-fatal), unless such loss, damage or injury is proximately caused by the
gross negligence of Landlord or its employees. Landlord may make, modify, and
enforce reasonable rules and regulations relating to the parking of automobiles
and Tenant will abide by such rules and regulations.
Section 14. Common Areas
- -------------------------
All automobile parking areas, driveways, entrances and exits thereto, and other
facilities furnished by Landlord, including all parking areas, stairways, and
other areas and improvements provided by Landlord for the general use, in
common, of tenants, their officers, agents, employees, invitees, licensees,
visitors and customers shall be at all times subject to the exclusive control
and management of Landlord, and Landlord shall have the right from time to time
to establish, modify and enforce reasonable rules and regulations with respect
to all facilities and areas mentioned in this paragraph. Landlord shall have
the right to construct, maintain and operate lighting facilities in or on said
areas; amend the level, and location and arrangement of parking areas and other
facilities hereinabove referred to; to restrict parking by and enforce parking
charges to tenants, their officers, agents, invitees, employees, licensees,
visitors and customers; to close all or any portion of said area or facilities
to such extent as may, in the opinion of Landlord's counsel, be legally
sufficient to prevent a dedication thereof or the accrual of any rights to any
person or the public therein; to close temporarily all or any portion of the
public areas or facilities; to discourage noncustomer parking, to charge a fee
for visitor and/or customer parking in such garage facility, and to do and
perform such other acts in and to said areas and improvements as, in the use of
good business judgment, the Landlord shall determine to be advisable with a view
to the improvement of the convenience and use thereof by tenants, their
officers, agents, employees, invitees, visitors, licensees and customers.
Section 15. Peaceful Enjoyment
- -------------------------------
Tenant shall, and may peacefully have, hold, and enjoy the Leased Premises,
subject to all other terms hereof, provided that Tenant pays the rent and other
sums herein recited to be paid by Tenant and performs all of Tenant's covenants
and agreements herein contained. It is understood and agreed that this covenant
and any and all other covenants of Landlord contained in the Lease shall be
binding upon Landlord and its successors only with respect to breaches occurring
during its or their respective periods of ownership of Landlord's interest
hereunder, provided that any change of ownership of the Building will not in and
of itself discharge Landlord of any liability to Tenant incurred prior to such
ownership change.
Section 16. Holding Over
- -------------------------
In the event of holding over the Leased Premises by Tenant without the written
consent of Landlord after the expiration or other termination of the Lease,
Tenant shall, throughout the entire holdover period, pay rent equal to one
hundred and fifty per cent (150%) of the Base Rental and Additional Rent which
would have been applicable had the term of this Lease continued for a period of
ninety (90) days. No holding over by Tenant after the expiration of the term of
this Lease shall be construed to extend the term of this Lease; and in the event
of any unauthorized holding over, Tenant shall indemnify Landlord against all
claims for damages by any other tenant or prospective tenant to whom Landlord
may have leased all or any part of the Leased Premise effective before or after
the expiration of the term of this Lease, resulting from delay by Tenant in
delivering possession of all or any part
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of the Leased Premises. Any holding over with the written consent of Landlord
shall thereafter constitute a lease from month-to-month, under the terms and
provisions of this Lease to the extent applicable to a tenancy from month-to-
month. Landlord shall have the right at all times during such holding over
period and without notice to enter and show the Leased Premises to prospective
tenants and real estate representatives.
Section 17. Alterations, Additions and Improvements
- ----------------------------------------------------
Tenant covenants and agrees with Landlord not to make any material alterations
or physical additions in or to the Leased Premises without first obtaining the
written consent of Landlord in each such instance. Landlord shall have the sole
right to refuse Tenant's request for improvements if these improvements are not
appropriate for the Building or Leased Premises. All such improvements or
additions made to the Leased Premises shall at once become the property of
Landlord and shall be surrendered to Landlord upon Lease termination, excepting
Tenant's file systems. Tenant shall be responsible for any lien filed against
the Leased Premise or any portion of the Building for work claimed to have been
done for, or materials claimed to have been furnished to Tenant. Any and all
such alterations, physical additions, or improvements, when made to the Leased
Premises by Tenant, shall be at the Tenant's expense and shall at once become
the property of the Landlord and shall be surrendered to Landlord upon
termination of this Lease by lapse of time or otherwise; provided, however, this
clause shall not apply to movable fixtures, office equipment, and other personal
property owned by Tenant.
Section 18. Use of Premises
- ----------------------------
The Leased Premises are to be used and occupied by Tenant solely for office
purposes and for no other purposes or use. By execution of this Lease, Tenant
agrees to accept the Leased Premises, subject to Exhibit "E."
Section 19. Laws and Regulations, Building Rules
- -------------------------------------------------
Tenant covenants and agrees with Landlord to reasonably comply with all laws,
ordinances, rules, and regulations of any state, federal, municipal or other
government or governmental agency having jurisdiction over the Leased Premises
and with all those reasonable rules and regulations established by Landlord,
attached hereto as Exhibit"D" and made a part hereof, and as may be altered by
Landlord from time to time for the proper operation, safety, care, and
cleanliness of the Leased Premises and Building and for the preservation of good
order therein, all changes to which will be sent by Landlord to Tenant in
writing and shall be thereafter carried out and observed by Tenant. In the
event of a conflict or inconsistency between the provisions of this Lease and
the provisions of the Rules and Regulations, this Lease shall control.
Section 20. Nuisance
- ---------------------
Tenant covenants and agrees with Landlord to conduct its business and to control
its agents, employees, invitees, and visitors in such manner as not to create
any nuisance, or interfere with, annoy, or disturb any other tenant or Landlord
in its operation of the Building.
Section 21. Entry by Landlord
- ------------------------------
Tenant covenants and agrees upon receipt of reasonable notice from Landlord to
permit Landlord or its agents or representatives to enter into and upon any part
of the Leased Premises at all reasonable hours with prospective purchasers,
prospective tenants of the Building, mortgagees, or insurers, to clean or make
repairs, alterations, or additions thereto, as Landlord may deem necessary or
desirable, and Tenant shall not be entitled to any abatement or reduction of
rent by reasons thereof.
Section 22. Assignment and Subletting
- --------------------------------------
(I) Tenant shall not, without the prior written consent of Landlord, which
shall not be unreasonably withheld, (A) assign or in any manner transfer this
Lease or any estate or interest therein, or (B) permit any assignment or
transfer of this Lease, or (C) sublease the Leased Premises or any part thereof,
or (D) grant any license, concession, or other right of occupancy of any portion
of the Leased Premises. Consent by Landlord to one or more assignments or
sublettings shall not operate as a waiver of Landlord's rights as to any
subsequent assignments and sublettings. Notwithstanding any approved assignment
or subletting, Tenant shall at all times remain fully responsible and liable for
the payment of the rent herein specified and for compliance with all of Tenant's
other obligations under this Lease and in the event of any assignment, by
operation of law, merger, consolidation or otherwise, any assignee shall assume
and agree to perform all obligations of Tenant hereunder. If an event of
default, as hereinafter defined, should occur while the Leased Premises or any
part thereof are then assigned or sublet, Landlord, in addition to any other
remedies herein provided or provided by law, may at its option, collect directly
from such assignee or sub-tenant, and apply such rent against any sums due to
Landlord by Tenant hereunder and Tenant hereby authorizes and directs any such
assignee or sub-tenant to make such payments of rent directly to Landlord upon
receipt of notice from Landlord. No direct collection by Landlord from any such
assignee or sub-tenant shall be construed to constitute a novation or a release
of Tenant from the further performance of its obligations hereunder. Receipt by
Landlord of rent from any assignee, sub-tenant, or occupant of the Leased
Premises shall not be deemed a waiver of the covenant contained in this Lease
against assignment and subletting or a release of Tenant under this Lease.
Tenant shall not mortgage, pledge, or otherwise encumber its interest in this
Lease or in the Leased Premises. Any attempted assignment or sublease by Tenant
in violation of the terms and covenants of this paragraph shall be void.
(II) In the event Tenant desires Landlord's consent to an assignment of the
Lease or subletting of all or a part of the Leased Premises and as a condition
to the granting of such consent, Tenant shall submit to Landlord in
5
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writing the name of the proposed assignee or sub-tenant, the proposed
commencement date of such assignment or subletting, the nature and character of
the business of the assignee or sub-tenant and such financial information as
shall be reasonably necessary for Landlord to determine the credit worthiness of
such proposed assignee or sub-tenant, Landlord shall have the option (to be
exercised within thirty (30) days from submission of Tenant's written request),
(A) to refuse to consent to Tenant's assignment or subleasing of such space and
to compel Tenant to continue this Lease in full force and effect as to the
entire Leased Premises; or (B) to permit Tenant to assign or sublet such space;
subject, however, to provisions satisfactory to Landlord for payment to Landlord
of any consideration to be paid by such proposed assignee or subtenant in
connection with such assignment or subletting in excess of Base Rental otherwise
payable by Tenant and for payment to Landlord of any lump sum payment in
connection with such assignment or subletting. If Landlord should fail to
notify Tenant in writing of its election as described above within such thirty
(30) day period, Landlord shall be deemed to have elected option (B) above.
Section 23. Transfers of Landlord
- ----------------------------------
Landlord shall have the right to transfer and assign, in whole or in part, all
its rights and obligations hereunder and in the Building and property referred
to herein, and provided Landlord's transferee assumes the duties and obligations
of Landlord arising from and after the date of any such transfer or assignment,
upon such transfer or assignment Landlord shall be released from any further
obligations hereunder, and Tenant agrees to look solely to such successor-in-
interest of Landlord for the performance of such obligations. Landlord shall
advise Tenant in writing of its assignee and all requisite contact names,
addresses and phone numbers prior to the effective date of assignment.
Notwithstanding the above, no such assignment will relieve Landlord of any
obligation to the Lease existing prior to such assignment and/or transfer.
Section 24. Subordination to Mortgage
- --------------------------------------
This Lease shall be subject and subordinate to any mortgage or deed of trust
which may hereafter encumber the Building, and to all renewals, modifications,
consolidations, replacements, and extensions thereof, which contain (or which
are included in a separate agreement) provisions to the effect that if there
should be a foreclosure or sale under power under such mortgage or deed of
trust, Tenant shall not be made a party defendant thereto, nor shall such
foreclosure or sale under power disturb Tenant's possession under this Lease,
provided always Tenant shall not be in default under this Lease. This clause
shall be self-operative and no further instrument of subordination need be
required by any mortgagee. In confirmation of such subordination, however,
Tenant shall at Landlord's request, execute promptly, and in any event, not
later than ten (10) business days, any certificate or instrument evidencing such
subordination, but no more than four (4) times in a twelve (12) month period.
In the event of the enforcement by the trustee or the beneficiary under any such
mortgage or deed of trust of the remedies provided for by law or by such
mortgage or deed of trust, Tenant will, upon request of any person or party
succeeding to the interest of Landlord as a result of such enforcement,
automatically become the Tenant of such successor-in-interest without change in
the terms or other provisions of this Lease.
Section 25. Mechanics Liens
- ----------------------------
Tenant will not permit any mechanic's lien or liens to be placed upon the Leased
Premises or improvements thereon or the Building during the term hereof caused
by or resulting from any work performed, materials furnished, or obligation
incurred by or at the request of Tenant, and nothing contained in this Lease
shall be deemed or construed in any way as constituting the consent or request
of Landlord, express or implied, by inference or otherwise, to any contractor,
sub-contractor, laborer, or materialman for the performance of any labor or the
furnishing of any materials for any specific improvement, alteration, or repair
of or to the Leased Premises, or any part thereof, nor as giving Tenant any
right, power, or authority to contract for or permit the rendering of any
services or the furnishing of any materials that would give rise to the filing
of any mechanic's or other liens against the interest of Landlord in the Leased
Premises. In the case of the filing of any lien on the interest of Landlord or
Tenant in the Leased Premises, Tenant shall cause the same to be discharged of
record within ten (10) days after the filing of same by paying the amount
claimed to be due and procuring the discharge of such lien. If Tenant shall
fail to discharge such mechanic's lien within such period, then, in addition to
any other right or remedy of Landlord, Landlord may, but shall not be obligated
to, discharge the same, either by paying the amount claimed to be due, or by
procuring the discharge of such lien by deposit in court or bonding. However,
if such lien is being contested by Tenant, Landlord may cure only in the event
of a pending sale or refinancing of the property. Any amount paid by Landlord
shall be repaid by Tenant to Landlord on demand, including interest thereon at
the rate of ten per cent (10%) per annum or the highest lawful rate, whichever
is the less.
Section 26. Estoppel Certificates
- ----------------------------------
Tenant will, from time to time, upon not less than ten (10) days prior request
by Landlord, and at Landlord's reasonable request, but no more than four (4)
times in a twelve (12) month period, execute, acknowledge, and deliver to
Landlord promptly, and in any event not later than ten (10) business days, a
statement in writing executed by Tenant certifying that Tenant is in possession
of the Leased Premises under the terms of the Lease, that this Lease is
unmodified and in full effect (or, if there have been modifications, that this
Lease is in full effect as modified, and setting forth such modifications), and
that as of such date the rent has been paid, and either stating that to the
knowledge of Tenant no default exists hereunder, or specifying each such default
of which Tenant may have knowledge, and such other matters as may be reasonably
requested by Landlord; it being intended that any such statement by Tenant may
be relied upon by any prospective purchaser or mortgagee of the Building.
Section 27. Events of Default
- ------------------------------
(I) The following events shall be deemed to be "Events of Default" by
Tenant under this Lease:
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(A) Failure to pay any installment of the Base Rental or other sums of
money payable hereunder when due and the continuance of such failure for ten
(10) days after receipt of written notice thereof;
(B) Failure to comply with any term, provision, or covenant of this Lease,
other than the payment of rent, and not curing such failure within a ten (10)
day grace period after written notice thereof to Tenant, or, if such failure
cannot reasonably be cured within such ten (10) day period, Tenant shall
commence such actions as are necessary to cure such defect within such ten (10)
day period and thereafter diligently prosecute such curative action.
(C) Tenant shall become insolvent, or shall make a transfer in fraud of
creditors, or shall commit any act of bankruptcy, or shall make an assignment
for the benefit of creditors or admission in writing of its inability to pay its
debts as they become due.
(D) Tenant shall file a petition with any bankruptcy court under any
section or chapter of the United States Bankruptcy Code, as amended, or under
any similar law or statute of the United States or any state thereof, or Tenant
shall be the subject of an order for relief issued under the United States
Bankruptcy Code, as amended, or under any similar law or statute, or Tenant
shall have filed any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under any
present or future federal or state act or law relating to bankruptcy, insolvency
or other relief of debtors, or Tenant shall be the subject of any order,
judgment or decree entered into by a court of competent jurisdiction approving a
petition filed against Tenant for any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal or state act relating to bankruptcy, insolvency or other relief
for debtors.
(E) A receiver, conservator or trustee shall be appointed for all or
substantially all of the assets of Tenant or of the Leased Premises or any of
Tenant's property located thereon in any proceeding brought by Tenant, or any
such receiver or trustee shall be appointed in any proceeding brought against
Tenant and shall not be discharged within sixty (60) days after such
appointment, or tenant shall consent or acquiesce in such appointment.
(F) The Leased Premises hereunder shall be taken on execution or other
process of law in any action against Tenant.
(II) If an Event of Default shall have occurred, Landlord shall have the
right at its election, then or at any time thereafter (and upon the expiration
of any applicable grace period, Tenant shall not be entitled to cure same and be
reinstated as "Tenant' in good standing hereunder), to pursue any one or more of
the following remedies in addition to all other rights or remedies provided
herein or at law or in equity:
(A) Landlord may terminate this Lease and forthwith repossess the Leased
Premises and shall be entitled to recover forthwith as damages a sum of money
equal to the total of (1) the cost of recovering the Premises, (2) the unpaid
rent earned at the time of termination, plus interest thereon at the rate of ten
percent (10%) per annum or the maximum legal rate, whichever is lesser, from the
due date, (3) the balance of the rent for the remainder of the term less the
fair market value of the Leased Premises for such period, and (4) any other sum
of money and damages owed by Tenant to Landlord in accordance herewith.
(B) Landlord may terminate Tenant's right of possession (but not the
Lease) and may repossess the Leased Premises by legal means or detainer suit,
without demand or notice of any kind to Tenant and without terminating this
Lease, in which event Landlord may, but shall be under no obligation to do so,
relet the same for the account of Tenant for such rent and upon such terms as
shall be satisfactory to Landlord. For the purpose of such reletting, Landlord
is authorized to decorate or to make any reasonable repairs, changes,
alterations, or additions in or to the Leased Premises and to incur leasing
commissions that may be necessary or convenient and reasonable, and (1) if
Landlord shall fail or refuse to relet the Leased Premises or (2) if the same
are relet and a sum equal to the rent that would have otherwise been paid by
Tenant over time, discounted to obtain present value shall not be realized from
such reletting after paying the unpaid Base Rental Amount and Additional Rent
due hereunder earned, but unpaid at the time of reletting, plus ten percent
(10%) interest thereon or the highest lawful rate, whichever is lesser, the cost
of recovering possession, and all of the reasonable costs and expenses of such
decorations, repairs, changes, alterations and additions, and leasing
commissions and the expense of such reletting and of the collection of the rent
accruing therefrom to satisfy the rent provided for in this Lease to be paid,
then Tenant shall pay to Landlord as damages a sum equal to the amount of the
rent reserved in this Lease for such period or periods, or if the Leased
Premises have been relet Tenant shall satisfy and pay any such deficiency upon
demand therefor from time to time, and Tenant agrees that Landlord may file suit
to recover any sums falling due under the terms of this Section 27 from time to
time; and that no delivery or recovery of any portion due Landlord hereunder
shall be any defense in any action to recover any amount not theretofore reduced
to judgement in favor of Landlord, nor shall such reletting be construed as an
election on the part of Landlord to terminate this Lease unless a written notice
of such intention be given to Tenant by Landlord. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect to
terminate this Lease for such previous breach.
Section 28. Landlord's Right to Relet
- --------------------------------------
In the event of default by Tenant in any of the terms or covenants of this Lease
or in the event the Leased Premises are abandoned by Tenant, Landlord shall take
reasonable steps to relet same for the remainder of the term provided for
herein, and if the rent received through reletting does not at least equal the
rent that would have otherwise been paid by Tenant over time, discounted to
obtain present value, Tenant shall pay and satisfy the deficiency between the
amount of the rent so provided for and that received through reletting,
including, but not limited to, the reasonable cost of renovating, altering and
decorating for a new occupant as well as any reasonable leasing commissions
incurred in connection therewith. Nothing herein shall be construed as in any
way denying Landlord the right, in the event of abandonment of the Leased
Premises or other breach of this Lease by Tenant, to treat the same as an entire
breach of this Lease and any and all damages which Landlord suffers thereby.
Section 29. Lien for Rent
- --------------------------
Landlord shall have a statutory lien as provided for by the laws of the State of
Texas.
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Section 30. Attorney's Fees
- ----------------------------
If on account of any breach or default by Tenant in its obligations hereunder,
Landlord shall employ an attorney to present, enforce or defend any of
Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable
attorney's fees incurred by Landlord in such connection.
Section 31. No Implied Waiver
- ------------------------------
The failure of Landlord to insist at any time upon the strict performance of any
covenant or agreement or to exercise any option, right, power, or remedy
contained in this Lease shall not be construed as a waiver or a relinquishment
thereof for the future. The waiver of or redress for any violation of any term,
covenant, agreement, or condition contained in the Lease shall not prevent a
subsequent act, which would have originally constituted a violation, from having
all the force and effect of an original violation. No express waiver shall
affect any condition other than the one specified in such waiver and that one
only for the time and in the manner specifically stated. A receipt by Landlord
of any rent with knowledge of the breach of any covenant or agreement contained
in this Lease shall not be deemed a waiver of such breach, and no waiver by
Landlord of any provision of this Lease shall be deemed to have been made unless
expressed in writing and signed by Landlord. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly installment of rent due under this
Lease shall be deemed to be other than on account of the earliest rent due
hereunder, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as rent be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such rent or pursue any other remedy in this
Lease provided.
Section 32. Insurance
- ----------------------
PROPERTY: Landlord shall maintain fire and extended coverage insurance on
the Building. Such insurance shall be maintained with an insurance company
authorized to do business in Texas, in amounts desired by Landlord and at the
expense of Landlord (as a part of the Operating Expenses), and payments for
losses thereunder shall be made solely to Landlord. If the annual premiums to
be paid by Landlord shall exceed the standard rates because Tenant's operations,
contents of the Leased Premises, or improvements with respect to the Leased
Premises are beyond building standard, Tenant shall pay the excess amount of the
premium within ten (10) days of receipt of written request by Landlord. Tenant
acknowledges and agrees that insurance coverage carried by Landlord will not
cover Tenant's property within the Leased Premises or the Building and that
Tenant shall be responsible, at Tenant's sole cost and expense, for providing
insurance coverage for Tenant's movable equipment, furnishings, trade fixtures
and other personal property in or upon the Leased Premise or the building, and
for any alteration, additions or improvements to or of the Leased Premises or
any part thereof made by Tenant, in the event of damage or loss thereto from any
cause whatsoever. Tenant reserves the right to self-insure the movable
equipment, furnishings, trade fixtures and other personal property in or upon
the Leased Premises or the building.
Tenant shall procure and maintain throughout the term of this Lease a policy or
policies of insurance, at its sole cost and expense, insuring Tenant and
Landlord against any and all liability for injury to or death of a person or
persons, occasioned by or arising out of or in connection with the use or
occupancy of the Leased Premises, the limits of such policy or policies to be in
an amount not less than $1,000,000 with respect to injuries to or death of any
person and in an amount of not less that $1,000,000 with respect to any one
accident or disaster, and shall furnish evidence satisfactory to Landlord of the
maintenance of such insurance. Tenant shall obtain a written obligation on the
part of such insurance company to notify Landlord at least 10 days prior to
cancellation of such insurance. It is recommended that Tenant carry fire and
extended coverage insurance on its personal property, as Landlord shall in no
event be required to rebuild, repair or replace any part of the furniture,
equipment, fixtures and other improvements which may have been placed by Tenant
on or within the Leased Premises.
Section 33. Legal Use and Violations of Insurance Coverage
- -----------------------------------------------------------
Tenant covenants and agrees with Landlord not to occupy or use, or permit any
portion of the Leased Premises to be occupied or used, for any business or
purpose which is unlawful, disreputable, or deemed to be extra-hazardous on
account of fire, or permit anything to be done which would in any way increase
the rate of fire, liability, or any other insurance coverage on the Building
and/or its contents. Landlord hereby agrees to provide Tenant written notice
from Landlord's insurer that Tenant's actions have resulted in an increase in
the rate of fire, liability, or any other insurance coverage on the Building
and/or its contents.
Section 34. Indemnity
- ----------------------
Each party to this Agreement agrees to indemnify the other for and defend and
hold the other harmless from and against all fines, suits, claims, demands,
liabilities and actions (including reasonable costs and expenses of defending
against such claims) resulting or alleged to result from any breach, violation
or non-performance of any covenant or condition hereof, or from the use or
occupancy of the Leased Premises, by said party or its agents, employees,
licensees, or invitees, for any damage to person or property resulting from any
act or omission or negligence of any co-tenant, visitor or other occupancy of
the Leased Premises except as the party's own negligence may contribute thereto.
Section 35. Waiver of Subrogation Rights
- -----------------------------------------
Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each
hereby waives any and all rights of recovery, claim, action, or cause of action,
against the other, its agents, officers, or employees, for any loss or damage
that may occur to the Leased Premises, or any improvements thereto, or any
personal property of such party
8
<PAGE>
therein, by reason of fire, the elements, or any other cause which are insured
against under the terms of standard fire and extended coverage of policies,
regardless of cause or origin, including negligence of the other party hereto,
its agents, officers, or employees, and covenants that no insurer shall hold any
right of subrogation against such other party.
Section 36. Casualty Damage
- ----------------------------
If the Leased Premises or any part thereof shall be damaged by fire or other
casualty, Tenant shall give prompt written notice thereof to Landlord. In case
the Building shall be damaged by fire or other casualty, but shall not be
rendered untenantable in whole or in part, Landlord shall, at its sole expense,
cause such damage to be repaired with reasonable diligence to substantially the
same condition in which it was immediately prior to the happening of the
casualty, and the Base Rental Amount hereunder shall not be abated; however, in
case the Building shall be so damaged by fire or other casualty that substantial
alteration or reconstruction of the Building shall, in the agreement of Landlord
and Tenant, or if they cannot agree, in the opinion of an independent third
party architect, be required (whether or not the Leased Premises shall have been
damaged by such fire or other casualty), or in the event any mortgagee under a
mortgage or deed of trust covering the Building should require that the
insurance proceeds payable as a result of said fire or other casualty be used to
retire the mortgage debt, Landlord or Tenant may, at their option, terminate
this Lease and the term and estate hereby granted by notifying Tenant in writing
of such termination within sixty (60) days after the date of such damage. If
Landlord does not thus elect to terminate this Lease, Landlord shall within
seventy-five (75) days after the date of such damage commence to repair and
restore the Building and shall proceed with reasonable diligence to restore the
Building which restoration shall be completed no later than 120 days from the
date of such damage to substantially the same condition as in Exhibit E and in
which it was immediately prior to the happening of the casualty, except that
Landlord shall not be required to rebuild, repair, or replace any part of
Tenant's fixtures, equipment or other personal property removable by Tenant
under the provisions of this Lease, and Landlord shall not in any event be
required to spend for such work an amount in excess of the insurance proceeds
actually received by Landlord as a result of the fire or other casualty.
Landlord shall not be liable for any inconvenience or annoyance to Tenant or
injury to the business of tenant resulting in any way from such damage or the
repair thereof, except that, subject to the provisions of the next sentence,
Landlord shall allow Tenant a proportionate diminution of rent based on the
percentage of the Leased Premises that is affected during the time and to the
extent the Leased Premises, or any portion thereof, are unfit for occupancy. If
the Premises or any other portion of the Building shall be damaged by fire or
other casualty resulting from the fault or negligence of Tenant or any of
Tenant's agents, employees, or invitees in the Leased Premises, the rent
hereunder shall not be diminished during the repair of such damage, and Tenant
shall be liable to Landlord for the cost and expense of the repair of such
damage, and Tenant shall be liable to Landlord for the cost and expense of the
repair and restoration of the Building caused thereby to the extent such cost
and expense is not covered by insurance proceeds. Any insurance which may be
carried by Landlord or Tenant against loss or damage to the Building or to the
Leased Premises shall be for the sole benefit of the party carrying such
insurance and under its sole control.
Section 37. Condemnation
- -------------------------
If the whole or substantially the whole of the Leased Premises should be taken
for any public or quasi-public use under any governmental law, ordinance, or
regulation or by right of eminent domain, or should be sold to the condemning
authority in lieu of condemnation, then this Lease shall terminate as of the
date when physical possession of the Leased Premises is taken by the condemning
authority. If less than the whole or substantially the whole Building or the
Leased Premises is thus taken or sold, Landlord (whether or not the Leased
Premises are affected thereby) may terminate this Lease by giving written notice
thereof to Tenant within sixty (60) days after the right of election accrues, in
which event this Lease shall terminate as of the date when physical possession
of such portion of the Building or Leased Premises is taken by the condemning
authority. If upon any such taking or sale of less than the whole or
substantially less than the whole of the Building or the Leased Premises, this
Lease shall not be thus terminated, the Base Rental Amount payable thereunder
shall be diminished by an amount representing that part of the Base Rental
Amount as shall properly be in Landlord's reasonable judgment, be allocable to
the portion of the Leased Premises which was so taken or sold or affected, and
Landlord shall, at Landlord's sole expense, restore and reconstruct the Parking
Area, Building or the Leased Premises, as the case may be, to substantially
their former condition to the extent that the same, in Landlord's judgment, may
be feasible; Landlord shall not in any event be required to spend for such work
an amount in excess of the amount received by Landlord as compensation awarded
upon a taking of any part or all of the Parking Area, Building or the Leased
Premises, and Tenant shall not be entitled to and expressly waives all claim to
any such compensation. Tenant, however, reserves Tenant's right to make any
claim against the condemning authority which Tenant, at Tenant's sole
discretion, deems to be appropriate.
Section 38. Notices and Cure
- -----------------------------
In the event of any act or omission by Landlord which would give Tenant the
right to damages from Landlord or the right to terminate this Lease by reason of
the constructive or actual eviction from all or part of the Leased Premises or
otherwise, Tenant shall not sue for such damages or exercise any such right to
terminate until it shall have given written notice of such act or omission to
Landlord, and a reasonable period of time for remedying such act or omission
shall have elapsed following the giving of such notice, during which time
Landlord and such holder(s) or either of them, their agents or employees, shall
be entitled to enter upon the Leased Premises and do therein whatever may be
necessary to remedy such act or omission. During the period after the giving of
such notice and during the remedying of such act or omission, all Rental Amounts
payable by Tenant for such period as provided in this Lease shall be abated and
apportioned only to the extent that all or any part of the Leased Premises shall
be untenantable.
9
<PAGE>
Section 39. Personal Liability
- -------------------------------
The liability of Landlord for any default by Landlord under the terms of this
Lease shall be limited to the interest of Landlord in the building and the land
on which the building is situated, and Tenant agrees to look solely to
Landlord's interest in the Building and the land on which the Building is
situated for the recovery of any judgment from Landlord, it being intended that
Landlord shall not be personally liable for any judgment of deficiency. This
clause shall not be deemed to limit or deny any remedies which Tenant may have
in the event of a default by Landlord hereunder which do not involve the
personal liability of Landlord.
Section 40. Notice
- -------------------
Any notice, communication, request, reply, or advice (hereinafter severally and
collectively called "notice") in this Lease provided for or permitted to be
given, made, or accepted by either party to the other must be in writing, and
may, unless otherwise in this Lease expressly provided, be given or be served by
depositing the same in the United States mail, postpaid and certified and
address to the party to be notified, with return receipt requested, or by
delivering the same in person to any office of such party, or by prepaid
telegram, when appropriate, addressed to the party to be notified. Notice
deposited in the mail in the manner herein above described shall be effective,
unless otherwise stated in this Lease, from and after the expiration of three
(3) days after it is so deposited. Notice given in any other manner shall be
effective only if and when received by the party to be notified. For purposes
of notice, the addresses of the parties shall, until changed as herein provided,
be as follows:
For Landlord: Independence Plaza, Ltd.
c/o The Bonner Group, Inc.
400 W. Illinois
Midland, Texas 79701
For Tenant: Costilla Energy
400 W. Illinois, Suite 1000
Midland, Texas 79701
The parties hereto and their respective heirs, successors, legal
representatives, and assigns shall have the right from time to time and at any
time to change their respective addresses and each shall have the right to
specify as its address any other address by at least fifteen (15) days written
notice to the other party delivered in compliance with this Section 40.
Section 41. Surrender
- ----------------------
On the last day of the term of this Lease or upon the earlier termination of
this Lease, Tenant shall peaceably surrender the Leased Premises to Landlord in
good order, repair, and condition at least equal to the condition when delivered
to Tenant, excepting only reasonable wear and tear resulting from normal use,
the damage by fire or other casualty covered by the insurance carried by
Landlord. All movable fixtures, office equipment, and other personal property
of Tenant shall remain the property of Tenant, and upon the expiration date or
earlier termination of this Lease may be removed from the Leased Premises by
Tenant, subject, however, to Landlord's lien for rent described herein;
provided, however, that Tenant shall repair and restore in a good and
workmanlike manner (reasonable wear and tear excepted) any damage to the Leased
Premises or Building caused by such removal. Any of such movable fixtures,
office equipment and other personal property not so removed by Tenant at or
prior to the expiration date or earlier termination of this Lease shall become
the property of Landlord. All other property as a part of the Leased Premises
attached or affixed to the floor, wall or ceiling of the Leased Premises
(including wall-to-wall carpeting, paneling or other wall covering) are the
property of Landlord and shall remain upon and be surrendered with the Leased
Premises as a part thereof at the termination of this Lease by lapse of time or
otherwise, Tenant hereby waiving all rights to any payment or compensation
therefor. Notwithstanding anything herein to the contrary, Tenant's surrender
of the Leased Premises shall in no way affect Tenant's obligation to pay rent to
the date of expiration of this Lease, whether or not the amount of such
obligation has been ascertained either as of the date Tenant surrenders the
Leased Premises or as of the date of expiration of this Lease.
Section 42. Relocation
- -----------------------
Intentionally omitted.
Section 43. Captions
- ---------------------
The captions of each section of this Lease are inserted and included solely for
convenience and shall never be considered or given any effect in construing this
Lease, or any provisions hereof, or in connection with the duties, obligations,
or liabilities of the respective parties hereto, or in ascertaining intent, if
any questions of intent exists.
Section 44. Entirety and Amendments
- ------------------------------------
This Lease embodies the entire contract between the parties hereto relative to
the subject matter hereof. No variations, modifications, changes or amendments
herein or hereof shall be binding upon any party hereto unless in writing,
executed by a duly authorized officer or a duly authorized agent of the
particular party. All exhibits referred to in this Lease and attached hereto
are incorporated herein for all purposes.
10
<PAGE>
Section 45. Severability
- -------------------------
If any term or provision of this Lease, or the application thereof to any person
or circumstance, shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of such term or provision to
personae or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and enforced to the fullest extent permitted by law.
Section 46. Binding Effect
- ---------------------------
Subject to Section 22, all covenants and obligations as contained within this
Lease shall bind, extend, and inure to the benefit of Landlord, its successors
and assigns, and shall be binding upon Tenant, its permitted successors and
assigns.
Section 47. Number and Gender of Words
- ---------------------------------------
All personal pronouns used in this Lease shall include the other gender, whether
used in the masculine, feminine, or neuter gender, and singular shall include
the plural whenever and as often as may be appropriate.
Section 48. Recordation
- ------------------------
Tenant agrees not to record this Lease, but on request of Landlord, will execute
a short form lease in a form recordable and complying with applicable Texas
laws. In no event shall such document set forth the rental or other charges
payable by Tenant under this Lease; and any such document shall expressly state
that it is executed pursuant to the provisions contained in this Lease and is
not intended to vary the terms and conditions of this Lease.
Section 49. Governing Law
- --------------------------
This Lease and rights and obligations of the parties hereto shall be
interpreted, construed, and
enforced in accordance with the laws of the State of Texas.
Section 50. Force Majeure
- --------------------------
Whenever a period of time is herein prescribed for the taking of any action by
Landlord, Landlord shall not be liable or responsible for, and there shall be
excluded from the computation of such period of time, any delays due to strikes,
riots, acts of God, shortages of labor or materials, war, governmental laws,
regulations or restrictions, or any act, omission, delay or neglect of Tenant or
any of Tenant's employees or agents, or any other cause whatsoever beyond the
control of Landlord. Furthermore, the foregoing shall in no manner release,
relieve or affect the independent obligation of Tenant to pay rent hereunder.
Section 51. Relationship of Parties
- ------------------------------------
Nothing contained herein shall create any relationship between the parties
hereto other than that of Landlord and Tenant, and it is acknowledged and agreed
that Landlord does not in any way or for any purpose intend, nor shall this
Lease be construed to create as between Landlord and Tenant the relation of
partner, joint venturer or member of a joint or common enterprise with Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple
original counterparts as of the date and year first above written.
Signed at Midland, Texas, this 12th day of Jan., 1996.
---- ----
LANDLORD TENANT
Independence Plaza, Ltd Costilla Energy
By: 400 W. Illinois L.C.
General Partner
By: /S/ A. W. RUTTER, JR. By: /S/ MICHAEL J. GRELLA
----------------------------- ----------------------------
Title: MANAGING PART. Title: PRESIDENT
-------------------------- -------------------------
M. GRELLA
11
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
TRACT 1
- -------
All of Lot six (6) and the south half (S/2) of Lot five (5) in Block twenty-
eight (28) of Original Town of Midland, Midland County, Texas, according to the
map or plat thereof recorded in Volume 3, Page 232 of the Deed Records of
Midland County, Texas.
TRACT 2
- -------
The south 25 feet of Lot three (3), all of Lot four (4) and the north half (N/2)
of Lot five (5) in Block twenty-eight (28) of Original Town of Midland, Midland
County, Texas, according to the map or plat thereof recorded in Volume 3, Page
232 of the Deed Records of Midland County, Texas.
12
<PAGE>
EXHIBIT "D"
LAWS AND REGULATIONS: BUILDING RULES
--------------------------------------
1. Landlord agrees to furnish Tenant with adequate keys to access the Building
and the Leased Premises. Additional keys will be furnished at a normal charge.
2. Tenant will refer all contractors, contractor's representatives and
installation technicians, rendering any service on or to the Leased Premises for
Tenant, to Landlord for Landlord's approval, and supervision before performance
of any contractual service, such approval shall not be unreasonably withheld.
This provision shall apply to all work performed in the Building including
installation of telephones, telegraph equipment, electrical devices and
attachments and installations of any nature affecting floors, walls, woodwork,
trim, windows, ceilings, equipment of any other physical portion of the
Building.
3. Tenant shall at no time occupy part of the Building as sleeping or lodging
quarters.
4. Tenant shall not place, install or operate on the Leased Premises or in any
part of the Building, any engine, stove or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the leased
Premises any explosives, gasoline, kerosene, oil, acids, caustics, or any
inflammable, explosive, or hazardous material without written consent of
Landlord.
5. Landlord will not be responsible except in the event of Landlord's willful
or gross negligence for lost or stolen personal property, equipment, money, or
jewelry from Tenant's area or public rooms regardless of whether such loss
occurs when area is locked against entry or not.
6. No birds, fowl or animals shall be brought into or kept in or about the
Building, with.the exception of seeing-eye dogs.
7. Employees of Landlord shall not receive or carry messages for or to any
Tenant or other person, nor contract with or render free or paid services to any
Tenant or Tenant's agents, employees or invitees.
8. Landlord will not permit entrance to Tenant's offices by use of pass key
controlled by Landlord, to any person at any time without written permission by
Tenant, except employees, contractors or service personnel directly supervised
by Landlord.
9. None of the entries, passages, doors, elevators, hallways or stairways
shall be blocked or obstructed, or any rubbish, litter, trash, or material of
any nature placed, emptied or thrown into these areas, nor any such areas by
used at any time except for ingress and egress by Tenant, Tenant's agents,
employees or invitees.
10. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting to them from misuse or by the defacing or injury of any part of the
Building shall be borne by the person who shall occasion it. No person shall
waste water by interfering with the faucets of otherwise.
11. Nothing shall be thrown out of the windows of the Building or down the
stairways or other passages.
12. Tenant agrees to reasonable parking control measures, which may be placed
into effect from time to time by Landlord through the use of signs, identifying
decals, or other instructions.
13. Movement in or out of the Building of furniture or office supplies and
equipment, or dispatch or receipt by Tenant of any merchandise or materials,
which requires use of elevators or stairways, or movement through the building
entrances, or lobby, shall be restricted to hours designated by Landlord. All
such movement shall be under supervision of Landlord and carried out in the
manner agreed between Tenant and Landlord by prearrangement before performance.
Such prearrangement will include determination by Landlord of time, method, and
routing of movement and limitations imposed by safety or other concerns which
may prohibit any article, equipment or any other item from being brought into
the Building. Tenant assumes, and shall indemnify Landlord against all risks
and claims of damage to persons and properties arising in connection with any
said movement.
14. No smoking is allowed in the Building lobbies, elevators, restrooms,
stairways, or any other common areas.
15. Landlord will provide and maintain an alphabetical directory board in the
ground floor lobby of the Building and allot one (1) name strip for Tenant.
16. The Landlord shall not be liable for damages from stoppage of elevators for
necessary or desirable repairs or improvements, or delays of any sort of
duration in connection with the elevator service.
17. All deliveries of any and all furniture, supplies, etc., will be made at
the back entrance of the Building. Tenant will instruct the suppliers of this
delivery location.
18. Areas in the Parking Garage designated as Visitor Parking will be reserved
as such during normal working hours. Tenants and their employees will observe
and respect this rule.
13
<PAGE>
The Landlord reserves the right to make such other and further reasonable rules
and regulations as in its judgment may from time to time be needful, for the
safety, care and cleanliness of the Building and Leased Premises, and for the
preservation of good order therein; subject only to the terms and conditions of
the attached Lease.
/S/ MICHAEL J. GRELLA
Tenant
14
<PAGE>
EXHIBIT "F"
SPECIAL PROVISIONS
1. Right of First Refusal for Additional Space:
Notwithstanding any of the provisions of this Lease to the contrary, as
long as Tenant is not in default under any of the provisions of this Lease
Agreement, Tenant shall have the right of first refusal to lease any additional
space that becomes available for lease on both the eleventh and the ninth floors
of the Building. Rent for said space shall be no more than market rent for
space of comparable size and utility located in the Building.
Any lease for additional space in the building which is in "slab"
condition, shall require a minimum lease term of five (5) years at a rental rate
of no less than $8.00 per rentable square foot during the first five (5) years
of the Lease Term, and no less than $10.00 per rentable square foot for any
additional space during the subsequent five (5) year term.
2. Right of Optional Cancellation:
Not later than forty-eight (48) months following the effective date of the
Lease Agreement, Tenant may notify Landlord of its intention to vacate the
Leased Premises at the end of sixty (60) months following the effective date,
without penalty whatsoever, (the "Optional Cancellation"). The Optional
Cancellation may be exercised ONLY to the extent Tenant, or any of its
affiliates, do NOT exercise that certain purchase option granted to Cadell S.
Liedtke and Michael J. Grella, pursuant to that certain option agreement dated
January 10, 1996.
15
<PAGE>
EXHIBIT 10.3
CONCESSION AGREEMENT
THIS AGREEMENT is made and entered into, this 6TH day of July 1995
BETWEEN
THE GOVERNMENT OF THE REPUBLIC OF MOLDOVA
AND
THE RESOURCE DEVELOPMENT COMPANY, LIMITED (REDECO, Ltd)
TO
EXPLORE FOR AND DEVELOP OIL AND GAS RESOURCES
IN THE REPUBLIC OF MOLDOVA
PREAMBLE
This agreement is concluded between the Government of the Republic of
Moldova and the Resource Development Company, Limited (REDECO), chartered in
the State of Delaware in the United States of America:
Whereby:
The Government, in consideration of a work commitment by REDECO that
includes: [1] development and production in the Valeni Oil Field commencing
in 1995, and the Victorophka gas fields in 1996; [2] commencement of a
multiyear 300-400 kilometer seismic survey beginning in 1996; [3]
commencement of exploratory drilling in 1997; and [4] development of newly
discovered fields as appropriate; and as stipulated and agreed to in the
Agreement of Intent between the Government of Moldova and REDECO, signed by
the Prime Minister of the Republic of Moldova and the President of REDECO on
the 16th of December 1994, and further explained as follows:
ARTICLE A TERMINOLOGY AND INTERPRETATION
The following terms are hereby defined, and are to be interpreted as
follows:
"Barrel of Oil" is defined as 43 gallons, or as one-seventh of one ton
of oil.
"Competent Authorities" means any proper authority belonging to the
State or Private sector, responsible to proceed to any action or deed
designated by the Constitution of the Republic of Moldova, statute of
administrative deed, including the Parliament, Government of the Republic of
Moldova (including any ministry, department, government agency, municipality,
or state enterprise, existing or to be established), or in any way having or
granted jurisdiction over a specific case or matter, whether directly or
indirectly.
<PAGE>
"Concession" is the treaty between the State and Concessionaire whereby
the State conveys its mineral resources to the Concession-holding company for
a defined period of time.
"Concession Area" is hereby defined as the entire territory of the
Republic of Moldova.
"Concession Commencement Date" means the date of signing of this
agreement by the Government of the Republic of Moldova whereby the
concessionaire will be held responsible for the design, finance,
construction, operation, exploitation and maintenance of the Concession
Project, pursuant to the terms of this Agreement.
"Drilling" includes both actual boring, as well as ongoing operations
requiring the presence of an operational drilling rig and its related
equipment, to include workover rigs, rathole drilling rigs, and extends to
downtime whereby on-site rigs are not operated due to testing requirements,
engineering related analysis, equipment breakdown or other reasonable project
related delays.
"Easement" includes actual points of access, routes of travel and entry,
and related rights-of-way used to access, service, and otherwise maintain and
conduct exploration and development activities as defined by this Agreement.
"Equipment" means both moveable and fixed equipment as necessary for
REDECO to accomplish its concession commitments to include oil and gas
exploration, field development, seismic exploration, and related facilities
operation.
"Exploration" is hereby defined as those activities related to the
search for and discovery of oil and gas, to include field surveys, aerial
surveys, seismic surveys, drilling site preparation, drilling, and well
testing.
"Facilities" permitted by this Agreement include refineries, tank farms,
pipelines, and gas stations.
"First Production" is defined as that point in time at which the first
ton of oil reaches an in-field oil storage tank; or, at that point in time at
which the first cubic meter of gas flows through a meter and into a gas
pipeline transmission system.
"Government" means any ministry, department, government agency,
statutory executive authority existing or to be established.
"Infrastructure" includes facilities required to gain access to
exploration and development activities and other facilities in accordance
with this Agreement.
"Production" is hereby defined as the extraction of oil and gas and
related by-products, the transportation and sale of these liquids and gases.
"Retail" is defined as the selling of both unrefined and refined
products to the commercial marketplace.
<PAGE>
"Royalty" is defined as the Government's total share of gross production
from any development activities permitted by this agreement, and that the
gross figure will be calculated after the separation of water and associated
waste gases and liquids normally removed at the field by industrial separator
equipment as may be required.
"Taxes" are those moneys, to include tariffs, customs, corporate and
individual income taxes, severance taxes, dividend taxes, and windfall profit
taxes as might be incurred during the course of normal business operations
that include commercial business activities and the import and export of
equipment and products (both natural and manufactured) and as may be further
defined by the laws of the Republic of Moldova.
ARTICLE B RIGHTS AND PRIVILEGES
1. The Government of the Republic of Moldova grants the following
rights and privileges to REDECO in return for REDECO's commitment to perform
exploration and development work at its own expense:
1.1. The exclusive right to develop the existing abandoned oil field of
Valeni, with approved development activity to include the drilling and
completion of production wells, installation of wellheads, pumps, gathering
lines, oil storage tanks, separators, storage and maintenance buildings,
roads, and the construction of well sites. Development rights for the Valeni
Oil Field are hereby granted for twnety years, from 1995 to 2015, with an
option to approve development and production for an additional twenty years,
from 2015 to 2035. Development rights for the Victorophka Gas Field are
hereby granted for twenty years, from 1996 to 2016, with an option to approve
development and production for an additional twenty years, from 2016 to 2036.
1.2. The exclusive right to explore for oil and gas in the Republic of
Moldova for a period of ten years, from 1995 to 2005. Exploration rights may
be extended for second ten year period, from 2005 to 2015. Also conveyed is
the right to convert discovered oil and gas resources to twenty-year
development projects on a field-by-field basis.
1.3. The right to build and operate refineries, equipment, facilities,
infrastructure, perform seismic surveys, drill exploratory wells, test and
complete wells that prove to have commercial quantities of oil and gas, and
utilize the information and technical resources of SPAF, the Institute of
Geophysics and Geology, and AGEOM as according to the appropriate charter of
each agency, and also conveyed are the rights to manufacture urea, liquid
natural gas, compressed natural gas and to sell these products. Regarding
information provided by AGEOM, it is understood by REDECO that information
obtained from AGEOM's Geological Archives must be purchased at approved
official published rates. Joint Ventures may be explored between the
Government and REDECO only if Government investment capital is applied.
2. DEVELOPMENT RIGHTS. Development rights granted for a period of
twenty years, on a field-by-field basis (as new fields are discovered and
developed for oil and gas and related by-product production) to REDECO are:
<PAGE>
2.1. The exclusive right to develop and operate the Valeny Oil Field,
the Victorophka Gas Field (which includes structures at both Baimaclia and
Enichioi), and to this end, to perform activities involved in the drilling
and operation of oil and gas wells and their attendant production facilities.
All of these works will be done in conformity with project design plans to
include environmental impact assessments and the State's ecological expertise.
2.2. The right to develop and operate other oil and gas fields as may be
found as a result of REDECO's exploration activities.
2.3 Development activities approved include the right to build and
operate: roads, pipelines, oil storage facilities, maintenance and storage
facilities and buildings, pumps and pumping stations, oil and gas separators,
and the maintenance of oil and gas wells, and the operations of downstream
facilities to include wholesale and retail oil terminals and gas stations.
2.4. Development activities will include the abandonment of
non-producing wells requiring the cementing of the hole back to the surface
of the casing string of pipe. Abandoned drilling and production sites will
be environmentally recovered to the previous ecology within the best efforts
and limits of generally acceptable site remediation practices, methods, and
technologies. Development activities will include environmental site surveys,
related studies, and documentation as required by Moldovan law.
2.5 Technical and geologic information will be provided solely to the
State Geological Archives. Production and economic data will be provided
solely to SPAF and MOLDOVAGAS.
2.6. REDECO will have the right to import its equipment, and the
equipment of its contractors and their subcontractors, without penalty of
import taxes or customs duties; and, the Government guarantees the extraction
of REDECO equipment from the Republic without penalty of tax or duty. These
rights extend to exploration activities.
2.7. In the case of threat of terrorism, sabotage, or armed conflict,
the Government guarantees that to the best of its ability it will provide the
security for all producing oil fields, pipelines, storage facilities, and
refineries, and for exploration and drilling sites.
2.8 The Government guarantees REDECO the right to hire and fire
Moldovan citizen employees as may the pleasure of REDECO management and
within the statutes of Moldovan Law.
2.9. The Government guarantees the movement of REDECO personnel and the
personnel of its contractors into and out of the Republic. These personnel
will be registered by the State which will arrange for long-term visas.
REDECO will sponsor the visits of Moldovan personnel involved in this
project's activities to the United States to the extent of Visa sponsorship.
2.10. Equipment, geologic samples, and technical information will be
protected as proscribed by Moldovan and United States laws and this data will
be protected by both parties from release to third parties without the mutual
consent of SPAF and REDECO, and these export samples and data will be
provided with expedited import and export from the territory
<PAGE>
of Moldova. REDECO will institute appropriate internal company security
measures to ensure the protection of project information, and to this end,
will ensure that geological and geophysical information utilized by
subcontractors will be fully recovered from those subcontractors and that any
residual information will be appropriately destroyed to deny the access of
said information to unauthorized third parties. REDECO will maintain a
master record of all of its project data holdings, and will provide and
updated record to SPAF on a routine basis.
2.11. The Government grants REDECO the right to export REDECO's share
of oil roduction. In this regard, the STATE (SPAF) has the right of first
refusal to purchase any and all oil produced for which it will pay in
currency at the prevailing market rate under conditions of Franco wellhead
and as determined by the price paid for the same quality crude oil in the
currently quoted Mediterranean oil market (Italy), less transportation and
insurance costs if any are included, and less a five percent (5%) discount
with said discount reserved for State buyers only. Pricing information will
be quoted by REDECO in both barrels and tons. The State will pay said market
price for oil and gas at the wellhead. By right REDECO can sell its share of
oil defined in Article C paragraphs 1.6 and 1.7. The Government grants that
said 5% discount does not extend to royalty payments made by REDECO from its
gross production as defined in the royalty payment schedule in Article C
paragraph 1.6. SPAF and MOLDOVAGAS guarantee cash payment in full to REDECO
within thirty (30) days of taking delivery of oil and gas.
2.12. Development rights are granted for a twenty year period,
commencing in the year that first production is attained, and development
rights may be extended for a second twenty year period by mutual agreement
between the Government and REDECO.
2.13. The Government of Moldova agrees to indemnify REDECO of any
environmental liability or associated damages due to, but not limited to,
acts of God (natural disasters), third party negligence or damage, acts of
sabotage or other forms of destruction. In turn, REDECO agrees to safeguard
its activities to the best of its abilities.
2.14. The royalty due to the Government, and as further defined in
Article C paragraph 1.6, and extends to all by-products of oil and gas
production to include gas condensates, sulphur, helium, carbon dioxide, and
asphalt.
2.15. The Government agrees that REDECO will have certain rights to
develop any other mineral resources that it encounters in during its
exploration and development work if REDECO begins to develop said resources
within 24 months of discovery. After two years, REDECO forfeits its first
rights and the Government may then assign these rights to a third party. All
of the mining and development details, to include royalty payments to the
Government, will be defined upon discovery and during the course of said two
year first-right period. Application of discovery will be made to the
Republic's Department of Norms and Standards.
2.16. REDECO agrees to turn over all facilities and equipment related
to development operations, without any pecuniary compensation, upon
termination of its development concession (defined in Article B, paragraphs
1.1, 1.2 and 1.3) whether termination is an act of the Government, REDECO or
mutually agreed to by both parties. If the Government terminates REDECO's
development activities prior to the periods defined in Article B, paragraphs
1.1, 1.2 and 1.3, then the Government guarantees full payment for all
facilities and related equipment.
<PAGE>
This does not include REDECO's company offices located in Chisinau, which
remain REDECO property in perpetuity.
2.17. KEEP WHOLE AGREEMENT. The case of war, border disputes, internal
strife or any other unanticipated political problem that would impede
exploration and development activities as defined by this Agreement, the
Government hereby guarantees that it will honor the terms of this Agreement
through the period of crisis and will permit the resumption of normal
exploration and development activities after it has declared that the crisis
has ended. If during a period of crisis REDECO finds that it must suspend
operations it will do so after appropriate notification to the Government,
and after receipt of the Government's permission. During a period of crisis,
the Government will make every reasonable effort to protect and defend oil
field property and equipment operated by REDECO. The State agrees not to
introduce any subsequent legislation that in any way detrimentally effects
the rights and intentions of this Agreement.
2.18. Upon implementation of this Agreement by virtue of its signing by
the Government, SPAF RM and REDECO will conclude a technical contract for
oil, and between the State Concern MOLDOVAGAS and REDECO for gas, prior to
the commencement of REDECO's field operations. The contracts will define the
technical and management relationships related to technical and
organizational issues between SPAF, MOLDOVAGAS and REDECO to include:
allocation of government lands, registration of alien REDECO personnel while
working in-country, the exact nature and timing of operational permissions,
definition of ecological and environmental programs, responsibilities for
local government relationships and contracts as may be necessary, liaison
with national and local utilities companies, and coordination of engineering
projects.
2.19. REDECO agrees not to produce more than five million tons per year
of oil equivalent without the expressed agreement of the Government.
2.20. The projects will be performed in accordance with the
environmental laws of Moldova, and in conformance with international
conventions to which Moldova is a signatory. If projects are performed in
sensitive ecological reserves, then the special environmental laws governing
those properties will be observed. If work is performed in the vicinity of
surface waters the special Moldovan laws refering to the protection of
surface waters will be observed.
2.21. LICENSING. REDECO will be issued a ten (10) year exploration
license by AGEOM, and a twenty (20) year development license by the
Department of Standards and Technical Norms.
3. EXPLORATION RIGHTS. The Government guarantees the following
exploration rights and privileges:
<PAGE>
3.1. The right to have access to any approved surface lands for the
purpose of conducting seismic surveys, and the right to ingress and egress
property as may be required by seismic crews.
3.2. The right to export seismic, well and geological data as may be
required for technical and laboratory analysis and evaluation. The analysis
of any such exported data will be provided to AGEOM. The export of all data
will be coordinated with AGEOM and other authorized Sate entities as may be
appropriate. Both parties guarantee to safeguard and protect this project's
information from release or exposure to third parties; and, that all said
technical information will remain confidential and may not be released or
sold in any manner to third parties without the mutual consent of AGEOM and
REDECO.
3.3. The right to construct drilling sites and to operate drilling rigs
and associated facilities for the purpose of drilling exploratory wells, and
the right to complete exploratory wells and the conversion of these to
development wells upon declaration of commercial discovery.
3.4. The right to build roads and temporary storage and maintenance
facilities as may be needed to conduct and perform exploration activities.
3.5. Exploration rights are hereby granted to REDECO for a ten (10)
year period, commencing in 1995 and lasting until 2005, and may be extended
for a second ten year period, from 2005 until 2015, through the mutual
agreement of the Government and REDECO.
3.6. The Government guarantees REDECO's access to all approved surface
lands related to exploration, development, and extraction of oil, gas and
related by-products. Land use will be guaranteed by the Government; and, the
Government accepts full responsibility and liability for the use of said
lands. REDECO also agrees to pay full site remediation and reclaimation costs
to ensure that once drilling and production operations have been completed,
that the land will be returned to its natural condition, defined as the
condition that it was in before field activities began.
ARTICLE C. REDECO WORK COMMITMENTS AND OBLIGATIONS
1. DEVELOPMENT PROJECTS - VALENI OIL AND VICTOROPHKA GAS FIELDS.
REDECO commits to performing the following work related to the commercial
development of oil and gas production from the two fields conveyed for
development rights by virtue of Article B, paragraphs 1.1, 1.2 and 1.3:
1.1. REDECO will drill a sufficient number of wells as necessary to
establish commercial oil production with each well completed to a depth of at
least 450 meters at Valeni, and 700 meters at Victorophka, and that it will
cement casing to the surface, log, test, and complete each well for which the
commercial presence of oil or gas is indicated.
1.2. REDECO will install oil production equipment as necessary to
operate each well, and to operate the field. This may include the
installation, operation and maintenance of pumps,
<PAGE>
generators, buildings, storage and maintenance facilities, oil and brine
water storage tanks, gathering lines, roads, protective berms and dikes,
raised production pads, fencing and related equipment and facilities.
1.3. REDECO will perform geologic analysis and will provide results of
this AGEOM.
1.4. REDECO will transport oil and gas as required, and this will
include transport by truck, railroad, or pipeline. REDECO will build and
operate pipelines as it deems may be required.
1.5. REDECO, through its Moldovan subsidiary REDECO-Moldova, will hire
Moldovan citizens for at least 95% of its worker, technical, and professional
employee positions in the Republic, and will provide requisite technical
training as may be required. Subcontractors are excluded from this clause,
as is the parent company, REDECO Ltd.
1.6. REDECO will pay the Government a royalty of twenty percent (20%)
of the total amount of oil, gas, and by-products (by products defined in
Article B, paragraph 2.13) during the first ten years of production from each
well, rising by five percent (5%) every five years after the first ten year
period, to the following scale:
Year 1-10 of production (by well) 20%
Year 11-15 25%
Year 16-20 30%
Year 21-25 35%
Year 26-30 40%
Year 31-35 45%
Year 36-40 50%
The Government will be paid its royalty in cash (US Dollars or Moldovan
Lei) or in kind (crude oil or gas), determined at the State's discretion.
Taking into consideration risky nature of this project the State hereby
grants REDECO a permanent exemption of fifty percent (50%) from net profit
taxes owed by REDECO as are defined by current tax tariff rates expressed in
Moldovan law. The State also requires REDECO's employees to pay personal
income tax and directs the company to pay its employees State social security
tax. REDECO is hereby exempted from all other taxes and duties as may be
usually required under Moldovan law.
1.7. REDECO reserves the right to refine its oil produced, and may
refine the State's share of oil production if required, and to market this
oil first in the Republic of Moldova. The State has right-of-first-refusal
to purchase REDECO's oil production, and MOLDOVAGAS will have right-of-first
refusal to buy REDECO's gas production; these purchase rights must be
exercised within fifteen days of notification to buy a production contract.
Both parties agree to pay prevailing market rates for production, pursuant to
the five percent (5%) discount identified in Article B, paragraph 2.10. In
the event that the Government does not exercise its purchase rights, is
unable to make payments or otherwise fails to purchase the refined oil or the
initially-
<PAGE>
produced crude oil, then REDECO will have the right to market its production
within the Republic first, and secondly, to export its production for sale,
with this pertaining to both unrefined and refined products. In the event
that the Government is unable to pay for oil and gas production already
received (i.e., purchased and delivered), and for which it has pledged
payment in good faith, REDECO will have the right to recover its payment in
the form of crude oil or gas production as subtracted from ongoing royalty
payments in an amount not to exceed fifty percent (50%) of any given royalty
payment.
1.8. Each well will be independently metered and royalties due will be
calculated from the metered production at the well head. Payment in-kind
(crude oil and gas) will be made at, and collected by the Government at, each
field's crude oil storage tanks, or in the case of gas, at the point where
the field's production enters a gas transmission system (pipeline). Cash
payment will be made by deducting the royalty percentage from the amount due
in all oil delivered to SPAF and gas delivered to MOLDOVAGAS, as calculated
from gross sales to these two agencies.
1.9. REDECO agrees that its construction standards will comply with
accepted international standards, and with Moldovan law, and will be
performed according to approved technical project plans.
2. EXPLORATION PROJECT - REPUBLIC OF MOLDOVA. Commencing in 1996,
REDECO agrees to perform the following work:
2.1. In 1996, REDECO will commence a multiyear 300-400 kilometer
seismic survey, concentrating in the southern areas of the Republic. Both
two and three dimensional data will be collected and processed into digital
models. Copies of all data will be provided to AGEOM to include certified
duplications of original digital data according to established regulations.
2.2. In 1997, REDECO will commence an exploratory drilling program,
guaranteeing the drilling of a sufficient number of deep wells on locations
selected by REDECO and its contractors, according to the results of seismic
investigations, to test for oil and gas in the Jurassic and Devonian
formations. The plans for this program will be coordinated with SPAF.
2.3. Appropriate State specialists may reside and work on-site and
REDECO will provide quarters and food to such qualified State personnel.
Redeco will contract logging, cementing, and other well site services with
qualified contractors who are in good standing with the international oil
industry.
2.4. REDECO will pay all expenses involved with: mobilizing and
shipping equipment and contractors, drilling activities, and related
administrative and logistic activities. The Government agrees to waive all
taxes, and to not levy any taxes, related to this Agreement and its sponsored
projects, according to the legislation of the Government of Moldova, beyond
that of the production royalty, land payment and 50% from net profit taxes as
specified in Article C paragraphs 1.6 and 4.1.
<PAGE>
3. OTHER COMMITMENTS
3.1. REPORTING. REDECO will commence monthly reporting to SPAF
beginning in the month following ratification of this Concession Agreement.
Copies of technical and geologic data will be provided monthly to AGEOM, and
production and economic data will be provided monthly to SPAF appended to
REDECO's monthly production report.
3.2. PLANNING. All plans for exploration and development activities
will be provided to an authorized agency for approval. Review and approval
will be conducted in good faith and in an expeditious manner, and that
authorized agency will do its best to accelerate its performance and that of
other government agencies that may be involved. When possible, joint
planning will occur. The Government reserves the right to suspend this
agreement if REDECO fails to fulfill any aspects of this agreement related to
performance and schedule. The Government will allow for reasonable delay
with at least thirty (30) days prior notification by REDECO. It is
recognized that only SPAF has the required expertise to represent the State's
oil interests, and MOLDOVAGAS to represent the State's gas interests.
3.3 MANAGEMENT. REDECO will establish an operations office in Chisinau.
REDECO management will be on-site at all field activities, and its designated
manager will exercise final approval authority for all field management,
operational and technical activities to include drilling, completion, well
workover, site preparation and evacuation, safety, security and related oil
field support and engineering activities.
3.4 MONETARY CONVERSION. The Government guarantees full exchange of
Moldovan Lei for United States Dollars, to occur within {F10}thirty (30) days
of claimancy by REDECO to the Government for redemption, only for payments
related to this Agreement.
3.5 INSURANCE. REDECO will provide insurance to cover accidents due to
its own negligence. This insurance will cover the costs of environmental
cleanup, losses of private property, and oil well firefighting.
4. LAND PAYMENT OBLIGATIONS. During the normal course of conducting
its business operations, it is recognized that REDECO will require access to
and use of both private and public properties. To this end, REDECO will pay
for the use of surface rights as hereby agreed to wit:
4.1. LEASE FEES. REDECO will pay lease fees as defined in existing
land lease prices and tariffs provided by Moldovan legislation.
4.2. GUARANTEES. The Government will take appropriate steps to
identify and guarantee the legal ownership of surface rights effected by the
exploration and drilling activities granted by this Agreement. Where private
ownership is unclear, or lands are publically held, the Government guarantees
the right for REDECO to lease the property as defined in paragraph 4.1 above.
The Government will ensure the availability of, and access to, surface
rights within the Concession Area and therefore undertakes to perform any
necessary expropriations, requisitions, or compulsory purchases in respect of
privately owned properties, of which the
<PAGE>
Concessionaire otherwise reasonably considers to be necessary to enable it to
carry out the Concession Project and otherwise fulfill its obligations under
this Agreement, and that the Government will be responsible for paying all
costs associated with the acquisition of such property.
ARTICLE D FORCE MAJEURE
REDECO shall not be liable for any failure or delay by it in complying
with any obligation under this Agreement as the Concessionaire, to the extent
that such failure or delay has been caused by any event or circumstance
presenting the characteristics of Force Majeure, such as: ware (whether
declared or undeclared); invasion, armed conflict or act of foreign enemy;
revolution, riot, insurrection, act of terrorism, sabotage, criminal damage
or threat of such acts; nuclear explosion, radioactive or chemical
contamination or ionizing radiation; earthquake; any effect of the natural
elements including geological conditions which it was not reasonably
practicable to allow for; the occurrence of any of the perils insured
against; strikes, other labor disputes, disturbances, or material economic
dislocations; any act or omission by the State affecting this Agreement such
as restrictions on the importation of any materials or machinery, any legal
directions or other disruptions caused by the encounter with antiquities and
other archeological sites, or the failure of existing or to-be-provided
necessary utilities.
ARTICLE E DISPUTES
The Government will establish a management oversight board, to with
REDECO will be permitted to have a sitting member present at all discussions
and points of decision. Points of contention will first be addressed by the
board, and where this fails to reach agreement, by mutual meeting between
Moldova's Vice Prime Minister and the President of REDECO Ltd. In the event
that a mutually agreeable solution to a situation is not reached then both
parties agree to submit to international arbitration pursuant to mutually
agreed upon rules and proceedures in accordance with international law. In
this regard, the Government of Moldova waives sovereign immunity and agrees
to submit to international arbitration. In turn, REDECO agrees to comply
with Moldovan Law in all of its activities conducted on Moldovan territory.
Furthermore, the State agrees to represent and protect REDECO and its assigns
from any and all civil and tort litigation that may occur in Moldova.
ARTICLE F GOOD FAITH
Both parties agree to operate in good faith, and to this end, to ensure
that effective communications are continuously maintained. To this end,
technical and administrative files regarding oil and gas exploration and
development activities will be fully open to and accessible by both parties,
in both Moldova and in the United States.
ARTICLE G AGREEMENT
This Concession is hereby awarded to REDECO by the Government of the
Republic of Moldova. Both parties agree to the conditions defined in this
document, which was drawn up
<PAGE>
in Moldovan, Russian, and English with three originals of this document
prepared in each language and all language versions are equal. A timetable
for this agreement is attached.
On behalf of the Government Of behalf of REDECO, Ltd.
of the Republic of Moldova
/s/ A. BANGLELIO /s/ WILLIAM J. COX
- ----------------------------------- -----------------------------------
A. Banglelio William J. Cox
Prime Minister of the President of REDECO, Ltd.
Republic of Moldova
<PAGE>
EXHIBIT 10.4
PURCHASE AND
JOINT EXPLORATION AGREEMENT
This Joint Exploration Agreement (the "Agreement") is entered into this
21st day of February, 1996 by and between COSTILLA ENERGY, L.L.C., a Texas
limited liability company ("Costilla") and RESOURCE DEVELOPMENT COMPANY LIMITED,
L.L.C. (DE), a Delaware limited liability company ("Redeco").
R E C I T A L S
(a) Redeco has entered into a Concession Agreement (the "Concession"),
dated July 6, 1995, with the Republic of Moldova ("Moldova") under the terms of
which Redeco has acquired rights to explore, develop and produce oil, gas and
other minerals within the geographic boundaries of Moldova, together with other
rights related to said production. The Concession is incorporated herein and
made a part hereof by reference.
(b) By Option Agreement dated October 17, 1995, as extended by Extension
of Option Agreement dated November 21, 1995 (collectively, the "Option"), for
the consideration of $25,000 paid to Redeco, Costilla has acquired from Redeco
an option to acquire an undivided 50% interest in the Concession. The Option is
incorporated herein and made a part hereof by reference.
(c) By this Agreement, Costilla is exercising its option and Redeco and
Costilla are agreeing to their respective rights and obligations under the
Concession.
I.
EXERCISE OF OPTION
1.1 EXERCISE OF OPTION. Contemporaneously with the execution of this
Agreement, Costilla has paid Redeco the sum of $90,000 and has agreed to bear
the first $750,000 of joint activities expenses, including but not limited to
direct and indirect drilling costs, travel, and related overhead expenses for
office operations and technical analysis, in Direct Oil and Gas Projects. By
such payment and agreement, Costilla has exercised its option under the Option.
In the event any provision of this Agreement conflicts with any provision of the
Option, this Agreement shall prevail.
1.2 ASSIGNMENT OF RIGHTS UNDER CONCESSION. Immediately upon execution of
this Agreement, Redeco shall execute and deliver to Costilla a conditional
assignment of an undivided 50% of Redeco's rights and obligations under the
Concession. Redeco and Costilla understand that the assignment by Redeco to
Costilla is subject to Moldova granting its written consent to the assignment
and, possibly, its consent to this Agreement and all other subsequent agreements
between Redeco and Costilla and satisfaction of the conditions precedent
recited
<PAGE>
above. In the event Moldova refuses to grant such written consent, Costilla's
exercise of the Option shall be void and Redeco shall be obligated to
immediately refund to Costilla all sums of money heretofore and hereafter paid
by Costilla to Redeco in connection with its exercise of the Option, as well as
all funds expended by Costilla, or its affiliates, relating to Concession
activities, in Moldova.
II.
NATURE OF RELATIONSHIP
2.1 DISCLAIMER OF PARTNERSHIP. This Agreement is not intended to create,
and shall not construed to create, a partnership, mining partnership, joint
venture, or other type of relationship pursuant to which a party hereto shall
have liability for the actions of the other (except as specified in Article III
hereof) in connection with the Concession Agreement, or otherwise. The
relationship of the parties hereto shall be as co-owners of the rights granted
to Redeco pursuant to the Concession Agreement, and such rights shall be
governed solely by the terms of this Agreement; provided however, as between
Redeco and Costilla, there shall be a fiduciary duty owed one to the other in
connection with all their dealings involving their business activities within
Moldova.
2.2 NAMING OF OPERATOR AND CONCESSIONAIRE. Costilla, or its designee,
shall be designated the Operator under this Agreement. Redeco, or its designee,
shall be designated the Concessionaire under this Agreement. The duties and
responsibilities of Costilla and Redeco in their respective roles shall be set
forth in Article III hereof.
2.3 ESTABLISHMENT OF ADDITIONAL ENTITIES. Costilla and Redeco acknowledge
and agree that each of them may form one or more domestic or foreign
subsidiaries to carry out the activities contemplated by the Moldovan
Agreements. Each of Costilla and Redeco consent to the formation of such
additional entities (domestic or foreign) as may be recommended by their
advisors; provided however, that any agreements between such entities will
either incorporate this Agreement by reference or restate the terms and
conditions of this Agreement. Costilla has caused to be formed Costilla Redeco
Energy, L.L.C. to succeed to all its rights (other than its rights as Operator)
under this Agreement, and the parties hereto, by their signatures below (as well
as the signature of Costilla Redeco Energy, L.L.C.) recognize that the Costilla
Redeco Energy, L.L.C. has succeeded to all such rights. Costilla additionally
intends to cause to be formed a subsidiary or affiliate which will succeed to
its rights as operator hereunder.
2.4 COVERAGE OF THIS AGREEMENT. The parties intend that this Agreement
cover their rights and responsibilities with respect to the Concession
Agreement, and such projects as may be ancillary thereto. Specifically, the
parties intend that this Agreement shall cover the following activities:
(a) Development of the abandoned field of Valeni.
2
<PAGE>
(b) Development of the Victorophka gas fields.
(c) Exploration or development of other oil and gas properties.
(d) Geophysical, geological or geochemical studies for exploration and
development of hydrocarbons.
(e) General and administrative expenses associated with the activities
described in (a) through (d) above, including but not limited to
travel and lodging expenses, as well as the payments made pursuant to
Article VI hereof.
(f) Costs and expenses associated with any attempts made by Costilla to
obtain third party financing for the activities described in (a)
through (d) above.
(g) Refineries.
(h) Distribution and transportation pipelines (excluding gathering lines
or gathering line systems which shall be considered part of the
facilities relating to the exploratory or development wells to which
they pertain.)
(i) Liquified natural gas facilities.
(j) Wholesale and retail oil terminals and gas and gasoline stations.
(k) Development of any other mineral resources, including geophysical,
geological or geochemical studies, subject to the time limitations
imposed in the Concession for the development of said resources.
The matters covered by subsection (a) through (k) of this Section 2.4 are
referred to herein as "Direct Projects" and the matters covered by subsections
(a) through (f) are also referred to as "Direct Oil and Gas Projects". In
addition, this Agreement may cover certain projects and opportunities which
shall be referred to herein as "Indirect Projects". Indirect Projects are those
projects and opportunities that, although not specifically mentioned in the
Concession, arise by virtue of or "spin-off" from, the Concession. Unlike
Direct Projects which are initially proposed by the Operator, Indirect Projects
may also be proposed by any non-operator. Indirect Projects must relate to the
Direct Projects in some manner. It is recognized that Indirect Projects may
impact Direct Projects and Direct Projects shall take precedence unless jointly
agreed otherwise. The proposal of an Indirect Project and scope thereof will be
subject to review by the Operator for potential conflict with Direct Projects.
Assuming that the Operator does not find that a proposed Indirect Project
conflicts with a Direct Project, the Indirect Project, at the option of the
party proposing same, shall be conducted under such terms as the parties
participating in the Indirect Project may agree.
3
<PAGE>
In addition to Direct and Indirect Projects, either Redeco or Costilla may
propose "Miscellaneous Projects", being projects unrelated to the Concession
either directly or indirectly but which were acquired or envisioned as a result
of the parties' contacts in Moldova and which directly relate to doing business
either with Moldova or with citizens of Moldova. If either Redeco or Costilla
has a Miscellaneous Project it will be obligated to disclose same and offer it
to the other party on a right of first refusal basis. Bona fide disputes as to
whether a project is a Miscellaneous Project or an Indirect Project shall be
resolved in favor of its being an Indirect Project. Costilla and Redeco
recognize that a Miscellaneous Project may impact Direct or Indirect Projects
and the parties recognize that Direct or Indirect Projects shall take precedence
unless jointly agreed otherwise. Prior to proposing a Miscellaneous Project,
the form and scope of the project will be brought before the Operator for
discussion of potential conflicts with existing or proposed Direct and Indirect
Projects. Opportunities in the nature of personal service shall not give rise
to this right of first refusal and shall not be considered a Miscellaneous
Project.
2.5 CREATION OF OPERATING COMMITTEE. An Operating Committee shall be
formed which shall consist of the principals of Costilla and Redeco. Meetings
of the Operating Committee may be held as frequently as desired by Costilla and
Redeco, but not less than frequently than quarterly. At meetings of the
Operating Committee, other invited persons may attend and participate, if such
attendance and participation is agreed upon by both parties. The role of the
Operating Committee shall be advisory only; it being acknowledged and understood
that Costilla, in its capacity as Operator and Redeco, in its capacity as
Concessionaire, shall exercise the rights and duties granted to them under
Article III of this Agreement, but that the Operating Committee shall be free to
advise either Costilla or Redeco with respect to any matter covered by this
Agreement.
III.
DUTIES OF OPERATOR
3.1 POWER AND AUTHORITY OF OPERATOR. The Operator shall conduct, direct
and exercise full control over all activities to be conducted pursuant to the
Concession Agreement. Except as otherwise expressly provided in Sections 3.2
and 3.3 and elsewhere in this Agreement (including the advisory role of the
Operating Committee described in Section 2.5), all management powers over the
business and affairs of the activities to be conducted pursuant to the
Concession Agreement shall be exclusively vested in the Operator. The parties
recognize that Redeco is best poised to offer expert opinions regarding the
cultural and political aspects of the Concessions, as well as the Concession
inherent obligations and requirements, and Operator agrees to give serious
consideration to this counsel, giving it fair weight in all strategic decisions.
The Operator shall have full power and authority to do all things deemed
necessary or desirable by it to conduct the activities to be conducted pursuant
to the Concession Agreement without limitation (except as aforesaid), including
the right and power to:
(a) propose and adopt a budget for expenditures pursuant to
activities to be conducted pursuant to Direct Projects and Indirect
Projects, and cause a copy of said
4
<PAGE>
budget to be delivered to Redeco not later than December 1 of the year
preceding the year for which expenditures have been budgeted, except as to
calendar year 1996 as to which the budget will be delivered not later than
_________, 1996. Costilla will update the budget quarterly throughout a
calendar year and furnish all such updated revisions to Redeco. The rights
and obligations of Redeco with respect to its participation in such
activities are set forth in Article IV hereof;
(b) conduct and/or supervise all field operations, including drilling
and reworking of wells, and ordering equipment and all other ancillary
matters related thereto:
(c) purchase or otherwise acquire other real or personal property of
every nature considered necessary or appropriate to carry on and conduct
the activities contemplated by the Concession Agreement.
(d) contract with third parties for such purposes and to do any and
all other things necessary or appropriate to carry out the activities
contemplated by the Concession Agreement which could or might be done by a
normal and prudent operator in the development, operation and management of
its own property;
(e) purchase, lease, rent or otherwise acquire or obtain the use of
facilities, machinery, equipment, tools, materials and all other kinds and
types of real or personal property that may in anyway be deemed necessary,
convenient, or advisable in connection with carrying on the activities
contemplated by the Concession Agreement;
(f) make and enter into such agreements and contracts with such
parties and to give such receipts, releases and discharges with respect to
any and all of the foregoing and any matters incident thereto as the
Operator may deem advisable or appropriate;
(g) procure and maintain in force such insurance as the Operator
shall deem prudent to serve as protection against liability for loss and
damage as required by the Concession Agreement or which may be occasioned
by the activities contemplated by the Concession Agreement on behalf of
Costilla and Redeco or their assigns;
(h) prepay in whole or in part, refinance, recast, increase, modify
or extend any liabilities affecting the activities to be conducted pursuant
to the Concession Agreement and in connection therewith execute any
extensions or renewals of encumbrances on any or all of the property or
interest pledged to secure same;
(i) contract on behalf of Costilla and Redeco for the employment and
services of employees and/or independent contractors, such as independent
legal counsel and accountants; provided, however, that on disputed matters
with third parties involving more than $50,000, Redeco may elect to supply
its own legal counsel at its own expense;
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<PAGE>
(j) take, or refrain from taking, all actions, not expressly reserved
or limited by this Agreement, as may be necessary or appropriate to
accomplish the activities to be conducted pursuant to the Concession
Agreement;
(k) institute, prosecute, defend, mediate, arbitrate and settle
lawsuits or other judicial or administrative proceedings brought on or in
behalf of, or against Costilla or Redeco in connection with joint
activities to be conducted pursuant to the Concession Agreement, and to
engage counsel or others in connection therewith;
(l) take such other acts as may be incidental to the acts and things
expressly authorized by this Agreement; and
(m) take such other actions as may be permitted by the Operator under
the Operating Agreement, to the extent not inconsistent with the terms of
this Agreement.
In accomplishing all of the foregoing and in fulfilling its obligations
pursuant to this Agreement, the Operator may, in its sole discretion, retain or
use any affiliates' personnel, properties and equipment or the Operator may hire
or rent those of third parties and may employ on a temporary or continuing basis
outside accountant, attorneys, consultants and others on such terms as the
Operator deems advisable. No person, firm or corporation dealing with the
Operator shall be required to inquire into the authority of the Operator to take
any action or make any decision.
3.2 CERTAIN RESTRICTIONS ON OPERATOR'S POWER AND AUTHORITY.
Notwithstanding anything else expressed or implied to the contrary to this
Agreement, the Operator shall not have the power or authority to and shall not
perform or authorize any of the following acts without having previously
obtained the consent of Redeco:
(a) do any act in contravention of this Agreement;
(b) confess a judgment which could affect the rights of the parties
pursuant to the Concession Agreement;
(c) possess property interests arising from the Concession Agreement,
or assign rights in specific property interest arising from the Concession
Agreement, for other than the joint and mutual benefit of the parties
hereto or their assigns;
(d) use the property interests arising from the Concession Agreement
for other than the joint and mutual benefit of the parties hereto or their
assigns; and
(e) except as expressly provided herein, take any action with respect
to the property interests arising from the Concession Agreement which
benefits the Operator or an Affiliate thereof to the detriment of Redeco.
6
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3.3 POWER AND AUTHORITY OF CONCESSIONAIRE; LIMITATIONS.
(a) The Concessionaire shall be responsible for relations with the
Republic of Moldova and its duly authorized representatives, as well as the
administration of matters covered by the Concession within the Republic of
Moldova. In addition, the Concessionaire shall be primarily responsible
for related research with respect to the Concession; non-oil and gas
logistical matters such as the obtaining of housing, transportation, food
and the like; and the acquisition of leasehold interests or other similar
interests necessary to carry out the purposes of the Concession.
(b) In carrying out its duties as Concessionaire, Redeco agrees to
consult with Costilla, either through the Operating Committee, or
otherwise, but in the event of any disagreement with respect to the powers
to be exercised by the Concessionaire under Section 3.3(a), Redeco's
judgment shall be conclusive unless: (i) the action proposed to be taken by
Redeco would increase the financial commitment otherwise required pursuant
to the terms of the Concession; or (ii) would otherwise have a material
adverse effect on the Concession, or the transactions to be conducted
pursuant thereto.
3.4 LIABILITY OF PARTIES AND INDEMNIFICATION.
(a) Costilla, Redeco and their affiliates, members, managers,
officers, employees and agents, shall not be liable, responsible or
accountable in damages or otherwise to the other party hereto for any acts
or omissions that do not constitute gross negligence, willful misconduct,
or a breach of the express terms of this Agreement, and each party to this
Agreement shall indemnify and save harmless the other parties hereto and
their affiliates, members, managers, officers, employees and agents
(individually, "Indemnitee") from all liabilities relating to the
Concession Agreement or the activities conducted pursuant thereto. Any act
or omission performed or omitted by an Indemnitee on advice of legal
counsel or an independent consultant who has been employed or retained by
the Operator in accordance with Section 3.1 shall be presumed to have been
performed or omitted in good faith without gross negligence or willful
misconduct. THE PARTIES RECOGNIZE THAT THIS PROVISION SHALL RELIEVE ANY
SUCH INDEMNITEE FROM ANY AND ALL LIABILITIES, OBLIGATIONS, DUTIES, CLAIMS,
ACCOUNTS AND CAUSES OF ACTION WHATSOEVER ARISING OR TO ARISE OUT OF ANY
ORDINARY NEGLIGENCE BY ANY SUCH INDEMNITEE, AND SUCH INDEMNITEE SHALL BE
ENTITLED TO INDEMNIFICATION FROM ACTS OR OMISSIONS THAT MAY CONSTITUTE
ORDINARY NEGLIGENCE.
(b) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 3.4 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
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3.5 TAX ELECTIONS. The Operator shall make such tax elections as agreed
by the parties on behalf of Costilla and Redeco relating to the joint activities
to be conducted pursuant to the Concession Agreement.
IV.
PAYMENT OF COSTS AND DIVISION OF REVENUES
4.1 INITIAL ALLOCATION. Except as provided in this Section 4.1 and the
remainder of this Article IV, Costilla and Redeco shall each pay 50% of all
costs associated with activities conducted pursuant to the Concession Agreement
including the fees and expenses of advisors retained pursuant to Section 3.1(i)
of this Agreement. However, Costilla agrees that it shall be solely responsible
for and shall pay the initial sum of $2,000,000 (the "Initial Tranche"), which
shall include the $750,000 expenditure contemplated by Section 1.1 for the joint
account of Costilla and Redeco in Direct Oil and Gas Projects. Costilla and
Redeco acknowledge and agree that as of the date of this Agreement, $450,000 of
the Initial Tranche has been expended by Costilla.
4.2 UTILIZATION OF REVENUES TO PAY EXPENSES. Although no partnership is
intended to be created pursuant to this Agreement, Costilla and Redeco each
agree that all revenues which accrue to their respective interests shall be
initially paid to Costilla in its capacity as Operator. At such time that
Redeco has participated under alternative 4.4 (a) or (b) below and Costilla has
been paid all Reimbursable Amounts, Redeco may elect to either receive its
revenue directly or take its share of production in kind, provided, however that
Operator shall have continuing rights to market Redeco's share of production
should Redeco fail to timely make such arrangements. The Operator shall utilize
such revenues initially to pay budgeted expenses and to maintain a prudent cash
reserve, provided that such cash reserve is not anticipated to exceed 20% of the
authorized budget. Only when all budgeted expenses have been paid and adequate
reserves established will the Operator disburse any remaining funds.
4.3 PROJECT FINANCING. Recognizing that initial income to the parties as
a result of their operations to the Concession may be insufficient to meet
current financial obligations incurred as a result of the operations, both
Redeco and Costilla shall make a concerted effort to raise additional capital
either for the two of them, jointly, or, at least, for the benefit of Redeco.
Such funding may occur either in the form of debt financing or in the form of
equity funding from third parties, the latter being an acknowledged goal of
Redeco, either on its own or in concert with Costilla. At any time during the
expenditure of the Initial Tranche, and specifically at such time as the Initial
Tranche has been expended, Costilla may (prior to the expenditure of the Initial
Tranche) and shall (for a period of up to six months following the expenditure
of the Initial Tranche) use best efforts to secure project financing primarily
for the joint account of Costilla and Redeco, but at least for the benefit of
Redeco. Such funding may occur either in the form of debt financing or in the
form of equity funding from third parties. Such funding necessary to meet all
financial obligations relating to the parties' operations involving the
Concession shall herein, collectively, be referred to as "Project Financing."
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4.4 RIGHTS OF REDECO AFTER EXPENDITURE OF INITIAL TRANCHE. Once the
Initial Tranche has been expended, if Operator has a good faith belief that
revenues from the Concession will not be sufficient to fund anticipated
expenditures for Direct or Indirect Projects, it shall promptly provide a
written notice to such effect to Redeco. Redeco shall have a period of 180 days
from receipt of the notice (the "Notice Period") to elect one of the
alternatives set forth in this Section 4.4. Notwithstanding any existing
budgets or anything else to the contrary herein, Costilla agrees that during the
Notice Period, the total sums expended by Costilla for the joint account in
Direct Oil and Gas Projects shall not exceed $2,500,000, including expenditures
made by Costilla during the Notice Period. To the extent Redeco does not
provide notice of election by the conclusion of the Notice Period, it will be
deemed to have elected the alternative set forth in Section 4.4(c). The
alternatives available to Redeco during the Notice Period are:
(a) Accept the Project Financing obtained for the account of both
parties. In this connection, Redeco agrees to execute any documents, in
the same form as executed by Costilla, necessary to accomplish this
purpose; provided however, that should Costilla fail to execute such
documents, Redeco may satisfy this alternative by accepting and executing
the Project Financing as to its interest.
(b) Pay Costilla the sum of the following (the "Reimbursable
Amount"):
(i) 50% of all amounts spent by Costilla with respect to Direct
Oil and Gas Projects under the Concession, subject to a maximum amount
of $2,500,000, less $750,000; and
(ii) interest computed on the amount specified in Section
4.4(b)(i) from the date of each such expenditure until repayment
thereof at a floating rate equal to Nations Bank of Texas, N.A. prime
rate, plus .75%.
In the event Redeco pays the Reimbursable Amount, it will retain its
50% interest in the Direct Oil and Gas Projects under the Concession;
provided, however, that should Redeco subsequently fail to pay its share of
a budgeted expenditure, it shall forfeit its entire interest in the Direct
Oil and Gas Projects under the Concession in accordance with the terms of
the Operating Agreement; or
(c) Convert its interest in the Direct Oil and Gas Projects under the
Concession to a 7.5% Non-Participating Revenue Interest and not be
required to bear any of the Reimbursable Amount, or future costs, with
respect to the Direct Oil and Gas Projects under the Concession. Such Non-
Participating Revenue Interest shall be equal to 7.5% of the gross proceeds
attributable to the sales of oil, gas and other hydrocarbons from the lands
covered by the Concession and shall be owned by Redeco free and clear of
all costs and expense, except that it shall bear and pay its 7.5% share of
all royalties, taxes on production and any other levies imposed by the
Republic of Moldova not separately due and payable by Redeco on its Non-
Participating Revenue Interest.
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Amounts due and payable to Redeco will be paid in the same currency and at
the same exchange rate as payments are made to Costilla.
At any time during the Initial Tranche up until the end of the Notice
Period, Redeco may elect to proceed under alternative 4.4(b) above by
paying the Reimbursable amount as of that date.
4.5 NON OIL AND GAS PROJECTS. Notwithstanding the obligation of Costilla
and Redeco to pay 50% of all costs associated with activities conducted pursuant
to the Concession Agreement, either party may elect not to participate in the
costs of either a Direct Project (other than a Direct Oil and Gas Project) or an
Indirect Project at the time that such project is proposed, and may convert its
interest in such project to a non-cost-bearing interest functionally equivalent
to the Non-Participating Revenue Interest defined above in Section 4.4(c),
adjusted for the risks and cost structure of the business contemplated by such
project.
4.6 EARLY WITHDRAWAL BY COSTILLA. Should Costilla elect at any time to
cease participation under the Concession Agreement and withdraw from activities
conducted thereunder, it shall cede its interest in the Concession back to
Redeco, subject to a right to convert its interest in the Concession to a non-
cost-bearing interest functionally equivalent to the Non-Participating Revenue
Interest defined above in Section 4.4(c), adjusted for the risks and cost
structure of the business contemplated by such project.
V.
ASSIGNABILITY; RIGHT OF FIRST REFUSAL
5.1 ASSIGNABILITY. Either party may sell, assign, transfer, pledge,
hypothecate or otherwise dispose of its interest in the Concession, or its
rights or obligations thereunder or under any specific Direct or Indirect
Project, subject only to the provisions of Section 5.2.
5.2 RIGHT OF FIRST REFUSAL. In the event that any party shall receive a
bona fide offer for the purchase of such parties interest under the Concession
Agreement or one or more Direct or Indirect Projects, the terms of which it
desires to accept, it shall not sell any such interest without first complying
with this Section 5.2. First, it shall immediately send a notice in writing of
all of the terms and conditions of such offer, including, but not limited to,
the following:
(a) the name and address of the offeror;
(b) nature of the interest in the Concession Agreement or the Direct
or Indirect Projects proposed to be purchased;
(c) the price which the offeror proposes to pay;
(d) the financial arrangements for the payment of the purchase price;
and
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(e) all other material terms of the proposed transaction.
to the other party, and, in connection therewith, shall certify that such
offer is bona fide and genuine and that it intends to accept it according
to its terms. Such notice and certification shall be mailed to the other
party at its address as specified herein by registered or certified United
States mail, return receipt requested, with postage thereon prepaid. The
other party shall thereupon have the irrevocable right and option to
purchase and acquire the interest subject to such offer giving such notice
on the same terms and for the same purchase price as set forth in the
written notice. The other party shall be entitled to exercise its right
and option until the expiration of thirty (30) calendar days from the date
the notice was received by the other party; but shall not contact or
negotiate with the offeror during that thirty (30) day period.
VI.
MONTHLY PAYMENT TO REDECO
Commencing 1 January 1996 and through 31 December 1997, Costilla will pay
to Redeco (or to its assigns) the sum of $12,500 per month, with payments to be
made on the 1st day of each month. This payment amount will be renegotiated
upwards if and when total production exceeds 1,000 barrels per day equivalent
(oil or gas), assuming that the oil or gas is selling at a fair market price.
Costilla will also compensate Redeco for up to sixteen round-trip tickets per
year, and will pay term life insurance premiums for Mr. and Mrs. William J. Cox
up to a total face value of $1 million, with beneficiaries to be designated by
William J. Cox.
VII.
MISCELLANEOUS
7.1 ENTIRE AGREEMENT. Subject to the provisions of Section 2.3, this
Agreement constitutes the entire agreement of the parties with regard to the
subject matter of this Agreement and replaces and supersedes all other written
and oral agreements and statements of the parties relating to the subject matter
of this Agreement.
7.2 WAIVER. The failure of a party to insist in any one or more instances
on the performance of any term or condition of this Agreement shall not operate
as a waiver of any future performance of that term or condition.
7.3 HEADINGS. The headings used in this Agreement appear strictly for the
parties' convenience in identifying the provisions of this Agreement and shall
not affect the construction or interpretation of the provisions of this
Agreement.
7.4 BINDING EFFECT. This Agreement binds and inures to the benefit of the
parties and their respect successors, legal representatives and permitted
assigns.
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7.5 AMENDMENTS. No amendments to this Agreement shall become effective or
binding on the parties, unless agreed to in writing by all of the parties.
7.6 TIME. Time constitutes an essential part of each and every part of
this Agreement.
7.7 NOTICE. Except as otherwise provided in this Agreement, when this
Agreement makes provision for notice or concurrence of any kind, the sending
party shall deliver or address the notice to the other party by certified mail,
telecopy or nationally-recognized overnight delivery service to the following
address or telecopy number:
Costilla: Costilla Energy, LLC
511 West Texas
Midland, Texas 79701
(fax) (915) 686-6080
Redeco: Resource Development Company
Limited, LLC (DE)
2700 Liberty Tower
Oklahoma City, Oklahoma 73102
(fax) (405) 239-7337
7.8 GOVERNING LAW. The law of Texas shall govern this Agreement.
7.9 FOREIGN CORRUPT TRADE PRACTICES ACT AND OTHER FEDERAL LAWS. Each
party pledges and commits to the other that it will fully comply with the
Foreign Corrupt Trade Practices Act, as well as any other federal laws relating
to its activities in and with Moldova, its governmental representatives and
citizens and each party pledges immediate disclosure to the other of any
incident that may give rise to a potential complaint under the Foreign Corrupt
Trade Practices Act or any other federal law relating to their activities under
this Agreement.
7.10 MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto.
7.11 DISPUTE RESOLUTION. The terms of the Dispute Resolution Procedure
attached as Exhibit A dealing with the resolution of disputed matters shall be
specifically incorporated into and made a part of this Agreement.
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EXECUTED as of the day and year first set forth above.
COSTILLA ENERGY, LLC
By: /S/ MICHAEL J. GRELLA
--------------------------------
Name: MIKE GRELLA
--------------------------------
Title: President
--------------------------------
RESOURCE DEVELOPMENT COMPANY
LIMITED, L.L.C. (DE)
By: /S/ WILLIAM J. COX
--------------------------------
Name: WILLIAM J. COX
--------------------------------
Title: President
--------------------------------
COSTILLA REDECO ENERGY, L.L.C.
By: /S/ MICHAEL J. GRELLA
--------------------------------
Name: MIKE GRELLA
--------------------------------
Title: President
--------------------------------
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 30th day of June, 1996, between COSTILLA PETROLEUM
CORPORATION and COSTILLA ENERGY, L.L.C. (the "Companies") and BOBBY W. PAGE
("Page").
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
1. This Agreement shall be effective as of June 30, 1996, and shall
continue in effect for a three-year term ending June 30, 1999, provided however,
this Agreement will automatically renew for a period of one year, and successive
one-year periods thereafter, unless Page is notified of its termination in
writing by placing such notice in United States certified mail, return receipt
requested, postage prepaid at the address shown below, at least 90 days prior to
June 30, 1999, or 90 days prior to any successive anniversary date (being June
30th of each year) thereafter. This Agreement may also be terminated by the
Companies because of Page's willful misconduct, negligence, inability to perform
the services required, dishonesty, breach of a fiduciary duty, willful violation
of any law, rule, regulation (other than a law, rule or regulation relating to a
traffic violation or similar offense), or a material breach of any provision of
this Agreement, which remains uncured after 30 days' written notice to Page.
2. The Companies may terminate Page's employment hereunder without cause,
effective on the date written notice of such termination is placed in United
States certified mail, return receipt requested, postage prepaid, addressed to
Page at the address shown below. Termination without cause shall be deemed to
have occurred if the Companies significantly reduce Page's duties and
responsibilities in a manner inconsistent with his experience, training and
background; provided, however, that upon any termination without cause, Page
shall be paid the greater of the Base Salary then in effect for the remaining
term of the Agreement or one year's salary at the then Base Salary rate. Any
vested benefits of Page under any plan or agreement shall not be affected.
3. Page may terminate his employment hereunder upon at least one month's
written notice to the Companies placed in United States certified mail, return
receipt requested, postage prepaid to the address shown below, provided however,
if Page terminates his employment, the Companies' obligations under this
Agreement shall cease immediately except as provided below upon receipt of such
notice of termination by the Companies. If Page terminates his employment, he
will be paid his Base Salary on a pro rata basis through the last day worked.
4. Page's title during his term of employment shall be Senior Vice
President and Chief Financial Officer of both of the Companies. During the term
of this Agreement, and subject to the other provisions of this Agreement, Page
shall diligently provide services to the Companies by supervising the activities
of the Controller and coordinating the generation of financial statements and
information with the needs of management and agency and lender requirements; be
responsible for the working relationships with outside accountants, attorneys,
<PAGE>
commercial banks, investment bankers; plan and budget financial activities; and
supervise the administrative functions of the Companies, including human
resources.
5. Page agrees that this contract is one for full time employment, that
he will spend no less than 40 hours per week (subject to legal holidays and
vacations as set forth below) at this employment and that he will not engage in
the oil and gas business, including but not limited to, exploration, production,
purchase of commercial quantities of oil or gas, or oil or gas production
brokering, for his own account or that of any person or entity other than the
Companies while employed by the Companies.
6. As compensation for the services to be rendered by Page, the Companies
or one of them shall pay Page a Base Salary at the annual rate of $150,000
beginning June 30, 1996. The Base Salary beginning January 1, 1997, shall be at
the annual rate of $175,000; the Base Salary beginning January 1, 1998, shall be
at the annual rate of $185,000. Notwithstanding the quotation of the Base
Salary at an annual rate, Page will only be paid on a pro rata basis only for
the actual days worked if his employment is terminated.
7. In addition to the other compensation provided for herein, in the
event Costilla Energy, L.L.C. is merged into Costilla Energy, Inc. (the
"Corporate Successor") and, subsequent or contemporaneously therewith, the
Corporate Successor accomplishes an initial public offering of its equity
securities, Page shall be entitled to an option to purchase 75,000 shares of the
$.10 par value Common Stock of the Corporate Successor. The exercise price with
respect to such initial stock option shall be the initial public offering price,
and such option shall be immediately exercisable by Page, without restriction.
8. As an incentive bonus for execution of this Agreement, Page will
receive $25,000 on or before July 15, 1996, which is to include the cost of his
household move from Denver to Midland. Any other bonuses or incentive pay will
be determined and paid by the Companies from time to time, or not at all, at
their sole discretion.
9. As a perquisite, Page shall be entitled to receive payment of, or the
Companies shall purchase on his behalf, the initial membership fee to the
Midland Country Club. Other fringe benefits will be given to Page, such as
participation in the group health insurance plan, dental insurance plan, life
insurance plan, and 401K plan in accordance with the Companies' standard benefit
program, provided however, Page will receive a life insurance policy to be
effective for the term of this Agreement in an amount no less than $200,000 and
long-term disability insurance of 60% of monthly Base Salary up to $10,000 per
month.
10. Page shall be entitled to 15 days paid vacation in each calendar year,
earned pro rata each month. Page shall be entitled to all paid holidays given
by the Companies to its senior executive officers.
11. The Companies shall reimburse Page for any direct, reasonable and
necessary expenses incurred directly at the request of the Companies in the
performance of this
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<PAGE>
Agreement, such expenses to generally include, but not be limited to, travel,
lodging and meals incurred while away from Midland and any other directly
attributable expenses to carrying out Page's obligations under this Agreement.
12. If, as a result of Page's inability to perform the essential functions
of the duties set out herein, with or without accommodation, due to physical or
mental illness or injury, and if Page shall have been absent from his duties
hereunder for more than 180 days within any 365-day period, the Companies shall
be entitled to deliver written notice of termination to Page and if within 30
days after any such written notice of termination is given, Page shall not have
returned to the performance of his duties in accordance with the terms of this
Agreement, the Companies may terminate his employment hereunder upon written
notice placed in United States certified mail, return receipt requested, postage
prepaid to the address shown below. Upon the death of Page during the term of
this Agreement, the Companies shall continue to pay to Page's estate the Base
Salary for a period of 180 days following Page's death, following which the
obligations of the Companies under this Agreement shall terminate in their
entirety. Termination of Page's employment under this paragraph shall not
affect Page's entitlement to any vested benefits provided herein.
13. If any action at law or equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, as may be awarded by the court, costs and necessary
disbursements in addition to any other relief to which it may be entitled. This
provision shall be binding on the parties without regard to whether attorney's
fees would be due under statute or common law.
14. All notices authorized or required by the parties hereunder shall be
given in writing by United States certified mail, return receipt requested,
postage prepaid, and addressed to the party to whom the notice is given at the
addresses shown on the signature page. Notices shall be deemed given when
deposited in the United States mail. Each party shall have the right to change
its addresses at any time and from time to time by giving written notice thereof
to the other.
15. This Agreement shall be construed under and in accordance with the
laws of the State of Texas.
16. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, legal
representatives, successors and assigns where permitted by this Agreement.
However, the services to be provided by Page are personal and not performable in
satisfaction of this Agreement by any other person.
17. In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
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<PAGE>
18. This Agreement constitutes the sole and only agreement of the parties
hereto and supersedes any prior understandings or written or oral agreement
between the parties respecting the within subject matter. The parties agree
this contract can be modified only in writing and that Page will not rely on any
oral representations of any sort or character regarding his employment status,
salary, bonuses or benefits.
19. For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given when placed in United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to Page:
Bobby W. Page
5100 North A Street, Apartment 457
Midland, Texas 79705
If to the Companies:
Costilla Petroleum Corporation/Costilla Energy, L.L.C.
P. O. Box 10369
Midland, Texas 79702
Attention: President
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
20. The obligations and liabilities of the Companies hereunder shall be
joint and several in nature.
/s/ Bobby W. Page
------------------------------------------
BOBBY W. PAGE
COSTILLA PETROLEUM CORPORATION
By: /s/ Michael J. Grella
--------------------------------------
Michael J. Grella, President
COSTILLA ENERGY, L.L.C.
By: /s/ Michael J. Grella
-------------------------------------
Michael J. Grella, President
<PAGE>
EXHIBIT 10.12
KOCH
- --------------------------------------------------------------------------------
KOCH OIL COMPANY
Contract No: 18541
EXCHANGED WITH: EXCHANGE AGREEMENT Page: 1
Date: 1/05/96
COSTILLA PETROLEUM CORPORATION Confirming Agreement between
ATTN: SAL PAGANO Blaine Parrott
P. O. BOX 10369 and
MIDLAND, TX 79702 Sal Pagano
CUSTOMER CONTRACT: MT-SHE-1-EXC
- --------------------------------------------------------------------------------
KOCH OIL COMPANY WILL DELIVER
CRUDE TYPE: 1. Domestic Sweet
QUANTITY: A volume equal to the applicable percentage of the volume
purchased by Koch Oil Company from the leases listed in Exhibit
'A' attached.
TERM: 1. Effective 1/01/96 to 7/01/96 and continuing month to month
thereafter until cancelled by either party with 30 days
advance written notice.
DELIVERY: 1. By transfer in the facilities of Arco Pipe Line Company at
Cushing Terminal.
TITLE: 1. Shall pass from Seller to Buyer at the completion of the
transfer.
PRICE: 1. Koch Oil Company's posted price for West Texas Intermediate
crude oil deemed 40.0 degrees gravity plus $1.4500 per
barrel gathering and handling charges
KOCH OIL COMPANY WILL RECEIVE
CRUDE TYPE: 2. North Dakota Sweet
3. Wyoming Sweet
QUANTITY: The applicable percentage of the volume purchased by Koch Oil
Company from the leases listed in Exhibit 'A' attached.
CONTINUED ON NEXT PAGE
<PAGE>
Contract No: 18541
EXCHANGED WITH: EXCHANGE AGREEMENT Page: 2
Date: 1/05/96
COSTILLA ENERGY LLC Confirming Agreement between
ATTN: SAL PAGANO Blaine Parrott
P. O. BOX 10369 and
MIDLAND, TX 79702 Sal Pagano
CUSTOMER CONTRACT: MT-SHE-1-EXC
- --------------------------------------------------------------------------------
TERM: 2. Effective 1/01/96 to 7/01/96 and continuing month to month
thereafter until cancelled by either party with 30 days advance
written notice.
3. Effective 1/01/96 to 7/01/96 and continuing month to month
thereafter until cancelled by either party with 30 days advance
written notice.
DELIVERY: 2. From tankage and/or through mutually acceptable meters located at
the facilities of Seller at the leases in exhibit "A"
3. From tankage and/or through mutually acceptable meters located at
the facilities of Seller at the leases in exhibit "A"
TITLE: 2. Shall pass from Seller to Buyer as the crude oil passes the
outlet flange of the lease tankage or meter.
3. Shall pass from Seller to Buyer as the crude oil passes the
outlet flange of the lease tankage or meter.
PRICE: 2. Koch Oil Company's posted price for North Dakota Southern
Swtcrude oil deemed 40.0 degrees gravity plus $.9000 per barrel
Bonus at the lease level.
3. Koch Oil Company's posted price for Wyoming Sweet crude oil
deemed 40.0 degrees gravity plus $.9000 per barrel bonus at the
lease level.
SPECIAL
PROVISIONS
Payment due by wire transfer on or before the 20th of the month
following the month of delivery. Pricing will be on an E.D.Q. pricing
basis on both sides of the contract.
Koch will pay Costilla 100% including taxes.
*Please sign the attached Exhibit "B" Conditions of Payment at Lease
Level". Exhibit "B" will become a part of the contract and will allow
us to eliminate the signing of Indemnifying Division Orders on future
leases assigned to this contract.
CONTINUED ON NEXT PAGE
<PAGE>
Contract No: 18541
EXCHANGED WITH: EXCHANGE AGREEMENT Page: 3
Date: 1/05/96
COSTILLA ENERGY LLC Confirming Agreement between
ATTN: SAL PAGANO Blaine Parrott
P. O. BOX 10369 and
MIDLAND, TX 79702 Sal Pagano
CUSTOMER CONTRACT: MT-SHE-1-EXC
- --------------------------------------------------------------------------------
This agreement and the attached General Provisions represent the entire
agreement between the parties and where the General Provisions are inconsistent
with the specific provisions of the contract, the contract shall control.
If the foregoing conforms to your understanding of our agreement, please sign
and return one copy to signify your acceptance
ACCEPTED AND AGREED: ACCEPTED AND AGREED:
KOCH OIL COMPANY COSTILLA ENERGY LLC
BY /S/ ERIC P. MORK BY /S/ SAL J. PAGANO
------------------- ---------------------
Eric Mork
Vice President - Rocky Mt TITLE MGR - ENGR & OPERS
---------------------
DATE 1/22/96
-----------
<PAGE>
Contract No: 18541
EXCHANGED WITH: EXCHANGE AGREEMENT Page: 1
Date: 1/05/96
COSTILLA ENERGY LLC Confirming Agreement between
ATTN: SAL PAGANO Blaine Parrott
P. O. BOX 10369 and
MIDLAND, TX 79702 Sal Pagano
CUSTOMER CONTRACT: MT-SHE-1-EXC
- --------------------------------------------------------------------------------
EXHIBIT "A"
<TABLE>
<CAPTION>
LEASE NAME OPERATOR COUNTY ST APPLICABLE PERCENT EFFECTIVE DATE
<C> <S> <C> <C> <C> <C> <C>
0062674 STRINGER #1 14-1B COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062675 TANGE #2 COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062676 MADSEN #2 RE-ENTRY COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062677 MADSEN #1 COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062678 M NORAGER #1 COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062679 STRINGER #2 14-1B COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062680 WOODROW STAR #1-A COSTILLA ENERGY LLC MCKENZIE ND 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062681 ELLA MANY RIBS #2A COSTILLA ENERGY LLC MCKENZIE ND 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062682 KATE HOPKINS #2 COSTILLA ENERGY LLC MCKENZIE ND 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's,North Dakota Southern Sweet deemed 40 degrees
gravity
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
Contract No: 18541
EXCHANGED WITH: EXCHANGE AGREEMENT Page: 2.
Date: 1/05/96
COSTILLA ENERGY LLC Confirming Agreement between
ATTN: SAL PAGANO Blaine Parrott
P. O. BOX 10369 and
MIDLAND, TX 79702 Sal Pagano
CUSTOMER CONTRACT: MT-SHE-1-EXC
- --------------------------------------------------------------------------------
EXHIBIT "A"
<TABLE>
<CAPTION>
LEASE NAME OPERATOR COUNTY ST APPLICABLE PERCENT EFFECTIVE DATE
<C> <S> <C> <C> <C> <C> <C>
0062683 ELLA MANY RIBS # 1A COSTILLA ENERGY LLC MCKENZIE ND 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062684 RAYMOND NISKU UT COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062685 RAYMOND STATE N 16 COSTILLA ENERGY LLC SHERIDAN MT 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, North Dakota Southern Sweet deemed 40 degrees
gravity
0062686 PRAIRIE CRK MUDDY SD COSTILLA ENERGY LLC CROOK WY 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, Wyoming Sweet deemed 40 degrees gravity
0062687 LEWARK 6-1 COSTILLA ENERGY LLC CROOK WY 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, Wyoming Sweet deemed 40 degrees gravity
0062688 L H ROBINSON G #3 COSTILLA ENERGY LLC CROOK WY 1.0000000 1/96
PRICE: EDQ, ADJUSTMENTS 0.9000 P+ DESC -Koch Oil Company's, Wyoming Sweet deemed 40 degrees gravity
</TABLE>
<PAGE>
KOCH CONTRACT #18541
Exhibit "B"
Conditions of Payment at Lease Level
(Purchaser) (Seller)
To: Koch Oil Company From: Costilla Energy LLC
P. O. Box 2236 P. O. Box 10369
Wichita, KS 67201 Midland, TX 79702
Seller guarantees and warrants that it is the legal owner of, and/or has
the right to sell and deliver, all the oil (which, for the purposes hereof,
includes all liquid hydrocarbons purchased hereunder) produced from the lease
(s) listed on Exhibit "A".
Purchaser is authorized to receive for purchase, on the terms herein
stated, oil from such leases to the extent of your requirements, as
directed below:
One: PROCEEDS. The proceeds of said oil, after deducting any taxes imposed on
said oil which are required to be deducted by Purchaser and any trucking or
handling charges or other deductions agreed upon by Purchaser and Seller, shall
be paid to Seller monthly for oil received and purchased during the preceding
month by Purchaser. In the event of any adverse claim, assertion of lien, or
any dispute concerning title to the property described in this agreement or to
the mineral proceeds from such property, Purchaser may withhold payments for the
oil until the claim, lien assertion, or dispute is settled, without liability
for interest unless otherwise required by applicable statute. If requested,
Seller agrees to furnish evidence of title satisfactory to Purchaser. Should
Purchaser resell the oil to another purchaser who accepts delivery at the point
at which Purchaser takes title, settlements to Seller may be based on the
grades, measurements, volume computations. and/or deductions of that purchaser.
Two: INDEMNITY BY SELLER. In consideration of Purchaser buying the oil
hereunder, Seller agrees to indemnify Purchaser, its agents, successors,
assigns, and related entities, against any and all claims, liabilities, losses
damages, costs, expenses, and attorneys' fees relating to or otherwise arising
from the oil purchases under this agreement. Seller further agrees to make
settlement with all parties in interest, including settlement with the proper
authorities for taxes, interest, and penalties, if any, due upon said oil when
such taxes, interest and penalties are not deducted as authorized in Section One
hereof.
Koch Oil Company is required to withhold 31% in Federal Income Tax from payments
to owners who have not provided us with a taxpayer identification number. To
avoid the 31% withholding, please fill in your tax identification number in the
space provided below.
Tax ID # 75-2262668 Signature /s/ Sal J. Pagano
--------------------------------- --------------------
Owner #
<PAGE>
EXCHANGE AND BUY/SELL GENERAL PROVISIONS
1. MEASUREMENT AND TESTS: All measurements hereunder shall represent one
hundred percent (100%) volume, consisting of United States barrels of forty-two
(42) gallons, the quantity and gravity of which will be adjusted to sixty
degrees (60 DEGREES) Fahrenheit temperature. Procedures for measuring and
testing, except for delivery through positive displacement type meters shall be
computed in accordance with the latest ASTM published methods then in effect.
Procedures for such meter type deliveries shall be in accordance with the latest
ASME-API (Petroleum PD Meter Code) published methods then in effect. The crude
oil and/or condensate delivered hereunder shall be merchantable and acceptable
to the carriers involved but not to exceed on percent (1%) BS&W and full
deduction shall be made for all BS&W content according to the ASTM Standard
Method then in effect. Should either party hereto fail to have a representative
present during such measuring and testing, the measurement and tests of the
other party shall be accepted.
2. PAYMENT: Unless specifically stated otherwise on the reverse side of this
agreement, Buyer agrees to make payment to Seller for the crude oil and/or
condensate purchased hereunder not later than the 20th of the month following
delivery. Should the financial responsibility of Buyer at any time become
impaired, unsatisfactory, or unacceptable to Seller, or if sales to Buyer should
exceed approved credit lines, then Buyer shall secure and deliver to Seller such
advance payments or other security, including in appropriate instances an
acceptable letter of credit, as shall be required by Seller, and deliveries of
oil and/or condensate hereunder may be withheld until such security is received.
If such security is not received within the time specified by Seller, then
Seller shall have the right to cancel this agreement.
3. WARRANTY: The Seller warrants title to all crude oil and/or condensate sold
and delivered hereunder and warrants that same shall be free from all royalties,
liens, and encumbrances, and that all taxes applicable prior to delivery,
including but not limited to any production, extraction or other state, federal
or local lease level tax as well as any taxes for which the "First Purchaser" is
responsible for paying or collecting, have been or will be paid. There are no
other representations, guarantees, or warranties, expressed or implied,
including particularly any implied warranty of fitness for a particular purpose,
or otherwise, which extend beyond the descriptions set forth explicitly in this
agreement. The parties agree that this transaction is in the ordinary course of
their respective business activities.
4. RULES AND REGULATIONS: All of the terms and provisions of this agreement
shall be subject to the applicable orders, rules and regulations (hereinafter
generically referred to as "Regulations") of all governmental authorities having
or purporting to have jurisdiction in the premises. If at any time or from time
to time such regulations should be amended or should new regulations be adopted
and the effect of such amended or new regulation (a) is not covered by any other
provision of this agreement and (b) has an adverse economic effect upon either
party hereto or its supplies or customers, the party affected shall have the
option to request renegotiation of the prices and other pertinent terms provided
for in this agreement. Said option may be exercised by such party at any time
after such amended or new regulation is promulgated by giving written notice of
the desire to renegotiate prior to the time of delivery of the oil, such notice
to contain the new prices and terms desired by the affected party. If the
parties do not agree upon new prices and terms satisfactory to both within
thirty (30) days after such notice is given, the affected party shall have the
right to terminate this agreement at the end of said thirty (30) day period,
except as provided in Paragraph 8 below.
5. FORCE MAJEURE: Either party hereto shall be relieved from liability for
failure to deliver or receive crude oil and/or condensate hereunder for the time
and to the extent such failure is occasioned by war, fire, explosion, riot,
strike or other industrial disturbances or concerned action of workmen, acts of
God, government regulations, disruption or breakdown of production or
transportation facilities, delays of pipeline carrier in receiving and
delivering crude oil and/or condensate tendered, by any decline in field
production, or by any other cause, whether similar or not to those heretofore
enumerated, reasonably beyond the control of such party.
6. EQUAL DAILY DELIVERIES: It is agreed that Buyer will pay for said crude oil
and/or condensate purchased hereunder on the basis of the posted price in effect
each day for the average number of barrels delivered each day during each month
hereunder. Such average shall be determined by dividing the total number of
barrels delivered hereunder during each month by the total number of days in
such month. The parties agree, conclusively, that delivery shall be presumed to
be made in equal daily quantities on the respective dates as determined
hereinabove and not on any other date.
7. CLAIMS: Claims for loss, damage or delay with respect to pipeline transfers
of title to crude oil and/or condensate hereunder must be filed by the claimant
in writing with the concerned carrier within the time specified in the
applicable tariff filed by such carrier. A copy of the claim as filed is to be
submitted to the other party hereto as soon as practicable. Failure of the
claimant to timely file such claim with the concerned carrier shall release the
other party hereto from all liability in respect of such claim.
All other claims as to shortage in quantity, to defects in quality, or any
other, except for demurrage, shall be made by written notice to the other party
within sixty (60) days after the delivery in question; claims for demurrage
shall be made within one (1) year after the delivery in question; otherwise, any
such claims shall be deemed to have been waived. No claims whatever shall be
made under this agreement for special, indirect, or consequential damages.
8. EXCHANGES: If these General Provisions apply to an exchange or a matching
purchase and sale arrangement, the second party shall be obligated to return the
volume of crude oil and/or condensate specified hereby if the party which is
first in time to perform delivers the crude oil and/or condensate as specified
herein. Except for differentials, if any are set forth on the reverse side of
this agreement, and other adjustments set forth in this agreement, this exchange
shall be on a barrel for barrel basis. If any reason should intervene to
obstruct return delivery on the agreed date, the parties will agree upon the
type, grade, and place of such a substitute delivery, and price differentials,
if any, to be made at the earliest reasonable date.
In the event an exchange imbalance arises as a result of this agreement as a
result of one party delivering prior to or more than the other party, subsequent
deliveries shall be applied first to such exchange imbalance and then to any
further deliver obligations, consistent with the pricing and delivery terms of
this agreement set forth above.
Any crude imbalances under this agreement upon termination will be settled by
either the sale of the crude imbalance by one party to the other at a mutually
agreeable price or by other mutually agreeable methods.
9. ASSIGNMENT: Neither party shall assign this agreement or any rights
hereunder without first obtaining the written consent of the other party hereto.
10. SAFETY: Each party agrees that its agents and employees will comply with
all safety regulations of the other when such agents or employees are upon the
premises of the other in connection with the performance of this contract.
11. RIGHTS OF SETOFF: In the event that either party shall default in any
payment or other performance under this or any other agreement existing by and
between the parties hereto, or if any suit, claim, demand, action or cause of
action shall be instituted involving any sums due under this or any other such
agreement, then and in any of those events the other party, at its option, shall
have the right to withhold any payment or any deliveries of crude oil and/or
condensate due under this or any other such agreement, or offset and deduct from
any payments or deliveries due under this or any other such agreement.
<PAGE>
12. BUSINESS PRACTICES: Each party hereto agrees to comply with all laws and
regulations applicable to activities carried out in the name of or on the behalf
of the other party under provisions of this agreement.
Each party hereto agrees that all financial settlements, billings and reports
rendered to the other party as provided for in this agreement will, to the best
of its knowledge, reflect properly the facts about all activities and
transactions related to this agreement.
Each party agrees to notify the other party promptly upon discovery of any
instance where the notifying party fails to comply with either provision above
or whose conduct by the notified party is considered, by the notifying party, to
be in breach of this agreement.
13. ADDITIONAL TERMS: No waiver by either party hereto of a breach of an
obligation owed hereunder by the other party shall be construed as a waiver of
any other breach, whether of the same or a different nature.
Any provision hereof which is legally unenforceable shall be ineffective only to
the extent of such unenforceability without thereby invalidating the remaining
provisions hereof or affecting the validity of enforceability of this agreement
as a whole.
This agreement contains the entire agreement between the Seller and Buyer with
respect to the subject matter hereof, and there are no other promises,
representations, or warranties affecting it.
The specific provisions contained in this agreement govern the general
provisions of this agreement in the event of any conflict between the two.
This agreement shall not be modified or amended except by written instrument
duly executed by officers or other duly authorized representative of the
respective parties.
<PAGE>
EXHIBIT 10.13
January 2, 1996
Costilla Petroleum Corporation
PO Box 10369
Midland, TX 79702
ATTN: Mr. Michael Grella
RE: FRONTIER CONTRACT NO. 9601-001B
COSTILLA CONTRACT NO. WY-CAM-1-LTR
CONTRACT DATE: January 2, 1996
Gentlemen:
This Agreement is made between FRONTIER OIL AND REFINING COMPANY, herein
referred to as Frontier, and COSTILLA PETROLEUM CORPORATION, herein referred to
as Costilla, whereby Seller agrees to sell and deliver and Buyer agrees to
purchase and receive crude oil or condensate under the terms and conditions set
forth below and in the General Provisions and Exhibit "A", attached hereto and
made a part hereof.
COSTILLA DELIVERS:
QUALITY: Wyoming General Sour type crude oil.
QUANTITY: Volume equal to production (approximately 650 barrels per day) from
the leases listed on attached exhibit. These leases are located in
Campbell and Crook Counties, Wyoming.
DELIVERY: Title shall pass from Seller to Buyer as it leaves Seller's tankage at
the various lease locations into Frontier's designated carriers.
PRICE: Texaco's posted price for Wyoming General Sour type crude oil, gravity
adjusted, plus $3.30 per barrel gathering and handling (equal daily
quantities).
PAYMENT: Made on the 20th of the month following the month of delivery. Buyer
will pay Seller as per signed Division Orders.
TERM: Effective January 1, 1996 for six (6) months and continuing month to
month thereafter unless terminated by either party upon giving thirty
(30) days advance written notice of such termination or cancellation
to the other party. Termination shall not affect rights or
obligations of either party accrued prior to the date of termination.
<PAGE>
Costilla Petroleum Corporation
Page Two
January 2, 1996
FRONTIER DELIVERS:
QUALITY: West Texas Intermediate type crude oil.
QUANTITY: Approximately 650 barrels per day.
DELIVERY: Via in-line transfer with the facilities of Arco Pipeline at Cushing,
Oklahoma terminal.
PRICE: Koch's posted price for West Texas Intermediate type crude oil, deemed
40 DEG., plus $1.35 per barrel gathering and handling (equal daily
quantities).
PAYMENT: Made on the 20th of the month following the month of delivery.
TERM: Effective January 1, 1996 for six (6) months and continuing month to
month thereafter unless terminated by either party upon giving thirty
(30) days advance written notice of such termination or cancellation
to the other party. Termination shall not affect rights or
obligations of either party accrued prior to the date of termination.
INVOICES AND NOTICES:
All invoices and notices given pursuant to this agreement shall be in writing or
by fax and shall be deemed delivered when received by the other party at the
addresses specified below.
Invoices to Frontier shall be mailed or faxed as follows:
Frontier Oil and Refining Company
ATTN: Mary Carpenter
Crude Oil Accounting
5340 South Quebec Street, Suite 20ON
Englewood, CO 80111-1911
FAX: (303) 714-0163
PHONE: (303) 714-0189
Notices and all other correspondence to either Buyer or Seller shall be mailed
or faxed as follows:
Frontier Oil and Refining Company
5340 South Quebec Street, Suite 20ON
Englewood, CO 80111-1911
ATTN: Crude Oil Supply & Trading
<PAGE>
PHONE: (303) 714-0144
FAX: (303) 714-0163
Costilla Petroleum Corporation
PO Box 10369
Midland, TX 79702
ATTN: Loretta B. Brown/Valley Gathering Company
PHONE: (915) 683-3092
<PAGE>
Costilla Petroleum Corporation
Page Three
January 2, 1996
Please return one fully executed copy of this Agreement to the attention of
Contract Administrator. If you do not respond within twenty (20) days from the
date of receipt of this letter, each term and condition set forth in this
Agreement will be considered accepted and therefore binding.
FRONTIER OIL AND REFINING COMPANY
/S/ MICHAEL R. NOVAK
- -------------------------------------
BY: Michael R. Novak
Manager, Lease Crude Acquisitions
AGREED TO AND ACCEPTED THIS 17TH DAY OF JANUARY, 1996.
COSTILLA ENERGY L.L.C.
BY: /S/ MICHAEL J. GRELLA
----------------------------------
Michael J. Grella
Title: President
Attachments
costilla.con
<PAGE>
FRONTIER OIL AND REFINING COMPANY
AND
COSTILLA PETROLEUM CORPORATION
FRONTIER CONTRACT NO. 9601-001B
COSTILLA ENERGY CONTRACT NO. WY-CAM-1-LTR
EXHIBIT "A"
LEASE
WELL NAME NUMBER LOCATION
- --------- ------ --------
Candy Draw Unit WY-079 53N-69W
Campbell County, WY
Schwartz Draw W.I.F. WY-080 Sec. 34-57N-74W
Campbell County, WY
USA Hoffine B #1 WY-081 NE SE Sec. 5-49N-67W
Campbell County, WY
L.H. Robinson F #1 WY-082 SE SE Sec. 5-49N-67W
Crook County, WY
<PAGE>
FRONTIER OIL & REFINING COMPANY
GENERAL PROVISIONS
WARRANTY: The party selling and/or delivering warrants title to all crude oil
sold and/or delivered hereunder and warrants that all such oil shall be free
from all liens and encumbrances and that all royalties applicable prior to
delivery shall have been or will be paid. Seller warrants that all crude oil
and, if applicable, lease condensate purchased is virgin material of marketable
quality. The crude oil and lease condensate purchased hereunder shall not
include refined products, natural gasoline, butane, propane, or any combination
thereunder, or any other substances or chemicals not normally associated with
virgin crude oil. Such party further warrants that said crude oil has been
produced, handled and transported to the delivery point hereunder in accordance
with all applicable laws, rules and regulations of all local, state and federal
authorities.
TITLE AND RISK OF LOSS: Title and risk of loss will pass to the party taking
delivery as the crude oil or condensate passes from equipment owned or
controlled by the party making delivery, or owned or controlled by a party
designated to make delivery on behalf of the party making delivery, into
equipment owned or controlled by the party taking delivery, or owned or
controlled by a party designated to take delivery on behalf of the party taking
delivery.
MEASUREMENTS AND TESTS: All measurements hereunder shall represent one
hundred percent (100%) volume, such volume and gravity adjusted to sixty
degrees (60 DEG.) Fahrenheit temperature. Procedures for measuring and
testing, except for deliveries through positive displacement type liquid
meters, shall be according to latest ASTM published methods then in effect.
Procedures for such metered type deliveries shall be according to latest
ASME-API published methods then in effect. The crude oil delivered hereunder
shall be merchantable and acceptable to the carriers involved and full
deduction shall be made for all BS&W content according to the latest ASTM
standard method then in effect. Should either party hereto fail to have a
representative present during such measuring and testing, the measurement and
tests of the other party will be accepted.
CONFIRMATION OF DELIVERY: Confirmation of delivery shall be based on run
tickets evidencing such delivery or allocation statements issued by the carriers
involved.
EQUAL DELIVERIES: For pricing purposes, crude oil or condensate delivered
during any given month hereunder shall be deemed to have been delivered in equal
daily quantities during such month except for deliveries made pursuant to meter
tickets, in which case deliveries shall be deemed to have been delivered in
equal daily quantities during the period covered by such meter ticket, and
deliveries made at lease locations, in which case the date recorded on the run
tickets issued by the carrier shall be used in determining the price.
BALANCING: In the case of exchanges, the parties agree to use their best
efforts to keep exchange quantities in balance pursuant to the terms of this
Agreement. Periodically, and at the end of the term of this Agreement,
imbalances shall be corrected. In case of an underdelivery, the underdelivering
party shall make up his/its underdeliveries, unless another method is mutually
agreed upon.
AUDIT: Each party and its duly authorized representatives shall have access to
the accounting records and other documents maintained by the other party which
relate to materials being delivered to the other party under this Agreement, and
shall have the right to audit such records at any reasonable time or times
within three years after termination of this Agreement.
DIVISION ORDERS: In the event either party signs a division order in favor of
the other party pertaining to the object of this Agreement, the terms of this
Agreement shall supersede the terms of such division order to the extent that
there may be a conflict between the two.
RULES AND REGULATIONS: All the terms and provisions of this Agreement shall be
subject to the applicable orders, rules and regulations of all governmental
authorities.
FINANCIAL RESPONSIBILITY: If either party's payments or deliveries to the other
party shall be in arrears, or the financial responsibility of either party
becomes impaired or unsatisfactory in the opinion of the other party, advance
cash payment or satisfactory security shall be given upon demand, and shipments
may be withheld by said other party until such payment or security is received.
If such payment or security is not received within 15 days from demand therefor,
the said other party demanding such payment or security may terminate this
Agreement. In the event either party makes an assignment or any general
arrangement for the benefit of creditors, or if there are instituted by or
against either party proceedings in bankruptcy or under any insolvency law or
law for reorganization, receivership or dissolution, the other party may
withhold shipments or terminate this Agreement without notice. Either party
shall have the option to terminate this Agreement by providing 10 days written
notice to the other party if a determination affecting this Agreement is made by
any governmental authority which creates a material adverse change in the basic
economics of this Agreement. The exercise by either party of any right reserved
under this section shall be without prejudice to any claim for damages or any
other right under this Agreement or applicable law.
TERMINATION AGREEMENT: The parties agree that any quantity of crude oil or
condensate, due and owing or to become due from one party to the other pursuant
to this Agreement, may be waived or otherwise settled by mutual agreement of the
parties in writing, without further consideration other than that which is set
forth in this Agreement.
<PAGE>
ASSIGNMENT: Neither party shall assign this contract without consent of the
other.
FORCE MAJEURE: Neither party shall be liable to the other for failure or delay
in making or accepting delivery hereunder to the extent that such failure or
delay may be due to compliance with acts, orders, regulation or requests of any
federal, state or local civilian or military authority or any other persons
purporting to act therefor; riots; strikes; labor difficulties; action of the
elements; transportation difficulties; or any other cause reasonably beyond the
control of such party, whether similar or not.
WAIVER CLAUSE: No waiver by either party of any breach of any of the covenants
or conditions herein contained to be performed by the other party shall be
construed as a waiver of any succeeding breach of the same or of any other
covenant or condition hereof.
TIMING: References to calendar dates set forth in this Agreement and any
amendments hereto, shall mean 7:00 a.m. of the dates indicated.
<TABLE>
<S> <C>
ADDRESSES:
- ----------
Exchange Statements, Contracts & Correspondence to: Invoices to:
FRONTIER OIL & REFINING COMPANY FRONTIER OIL & REFINING COMPANY
5340 South Quebec Street, Suite 200N 5340 South Quebec Street. Suite 200N
Englewood, CO 80111-1911 Englewood, CO 80111-1911
ATTN: Crude Oil ATTN: Crude Oil Payables
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12.1
COSTILLA ENERGY, INC.
EBITDA/INTEREST EXPENSE
(in thousands)
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------------- ---------------------------
Pro Pro
Historical Forma Historical Forma
-------------------------------------------- -------- ----------------- -------
1991 1992 1993 1994 1995 1995 1995 1996 1996
------ ------ ------ ------ -------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 234 $ 368 $ 73 $ 163 $(4,314) $(7,860) $(1,051) $ 12 $ (299)
Interest expense 179 365 605 1,458 4,454 11,631 407 1,704 2,908
Income taxes (2) 18 (23) 40 3 3 - - -
Exploration and abandonment 106 4 218 793 1,650 2,761 1,007 228 475
Depreciation, depletion and amortization 494 404 884 1,847 6,095 14,313 462 1,986 3,166
------ ------ ------ ------ ------- ------- ------- ------ ------
EBITDA $1,011 $1,159 $1,757 $4,301 $ 7,888 $20,848 $ 825 $3,930 $6,250
------ ------ ------ ------ ------- ------- ------- ------ ------
EBITDA/Interest expense 5.6x 3.2x 2.9x 2.9x 1.8x 1.8x 2.0x 2.3x 2.1x
------ ------ ------ ------ ------- ------- ------- ------ ------
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12.2
COSTILLA ENERGY, INC.
RATIO OF EARNINGS TO FIXED CHANGES
(in thousands)
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------------- -------------------------
Pro Pro
Historical Forma Historical Forma
----------------------------------------- ------- ---------------- ------
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ------ ------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before income taxes $232 $ 386 $ 50 $ 203 $(4,311) $(7,857) $(1,051) $ 12 $ (299)
Fixed charges 683 780 1,599 3,503 10,860 26,255 893 3,725 6,109
---- ------ ------ ------ ------- ------- ------- ------ ------
Earnings $915 $1,166 $1,649 $3,706 $ 6,549 $18,398 $ (158) $3,737 $5,810
---- ------ ------ ------ ------- ------- ------- ------ ------
Fixed charges:
Interest expense $179 $ 365 $ 605 $1,458 $ 4,454 $11,631 $ 407 $1,704 $2,908
Interest portion of operating lease payments 10 11 110 198 311 311 24 35 35
Depreciation, depletion and amortization 494 404 884 1,847 6,095 14,313 462 1,986 3,166
---- ------ ------ ------ ------- ------- ------- ------ ------
Fixed charges $683 $ 780 $1,599 $3,503 $10,860 $26,255 $ 893 $3,725 $6,109
---- ------ ------ ------ ------- ------- ------- ------ ------
Ratio of earnings to fixed charges 1.3 1.5 1.0 1.1 n/a n/a n/a 1.0 n/a
---- ------ ------ ------ ------- ------- ------- ------ ------
Amount that earnings are insufficient to
cover fixed charges n/a n/a n/a n/a $(4,311) $(7,857) $(1,051) n/a $ (299)
---- ------ ------ ------ ------- ------- ------- ------ ------
</TABLE>
<PAGE>
EXHIBIT 12.3
COSTILLA ENERGY, INC.
Pro Forma Ratio of ACTNA to Total Debt
As of March 31, 1996
(in thousands)
Discounted future net revenues from
proved oil and gas reserves $179,527
Capitalized costs of unproved properties 3,580
Net working capital 15,955
Other property and equipment, net (at cost) 1,724
Note receivable - affiliate 684
--------
Adjusted Consolidated Net Tangible Assets (ACTNA) $201,470
--------
Total debt $103,097
--------
Ratio of ACTNA to Total Debt 2.0x
--------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Costilla Energy, Inc. has the following subsidiaries (as defined in Rule
405 of the Rules and Regulations promulgated under the Securities Act of 1993,
as amended):
1. Costilla Petroleum Corporation, a Texas corporation;
2. Statewide Minerals, Inc., a Texas corporation;
3. Costilla Pipeline Corporation, a Texas corporation; and
4. Valley Gathering Company, a Texas corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Midland, Texas
July 26, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
As independent engineering consultants, we hereby consent to the use of our
Summary Reserve Report entitled "Summary Letter (for Inclusion in a Prospectus
Included in a Registration Statement for Costilla Energy, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum Consultants, Inc.
Evaluations (1) to the Interests of Costilla Petroleum Corporation in Various
Properties and (2) to the Interests of Parker & Parsley Petroleum USA, Inc. in
Various Properties Included in Their First Quarter 1996 Sales Package, Effective
April 1, 1996, Williamson Project 6.8393" dated July 23, 1996 prepared for
Costilla Energy, Inc., and data extracted therefrom (and all references to our
Firm, including any references as Experts) included in or made part of the
Prospectus included in this Registration Statement on Form S-1.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
July 23, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
ELMS, FARIS & CO., P.C.
Midland, Texas
July 26, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being certain of the
Officers and all of the Directors of Costilla Energy, Inc., a Delaware
Corporation, do hereby constitute and appoint Michael J. Grella and Bobby W.
Page, or either of them, with full power of substitution, our true and lawful
attorneys and agents, to do any and all acts and things in our names in the
capacities indicated which Michael J. Grella and Bobby W. Page, or either of
them, may deem necessary or advisable to enable the Company to comply with
the Securities Act of 1933, as amended, any state securities laws and any
rules, regulations and requirements of the Securities and Exchange Commission
in connection with the Registration Statement seeking to register
$100,000,000 of _____% Senior Subordinated Notes due 2006 of Costilla Energy,
Inc., including specifically, but not limited to, the power and authority to
sign such Registration Statement, any and all amendments (including
post-effective amendments) to such Registration Statement and any other forms
or documents related to such Registration Statement which are required under
federal or state securities laws for us, or any of us, in our names in the
capacities indicated; and we do hereby ratify and confirm all that Michael J.
Grella and Bobby W. Page, or either of them, shall do or cause to be done by
virtue hereof. This Power of Attorney may be signed in any number of
counterparts, and each such counterpart shall be considered an original
hereof.
IN WITNESS WHEREOF I have hereunto set my hand this 12th day of July,
1996.
/s/ CADELL S. LIEDTKE
----------------------------------------------
CADELL S. LIEDTKE, Chairman of the Board,
Chief Executive Officer and Director
/s/ MICHAEL J. GRELLA
----------------------------------------------
MICHAEL J. GRELLA, President, Chief
Operating Officer and Director
/s/ HENRY G. MUSSELMAN
----------------------------------------------
HENRY G. MUSSELMAN, Executive Vice
President and Director
/s/ BOBBY W. PAGE
----------------------------------------------
BOBBY W. PAGE, Senior Vice President,
Treasurer and Chief Financial Officer
/s/ JERRY LANGDON
----------------------------------------------
JERRY LANGDON, Director
/s/ W.D. KENNEDY
----------------------------------------------
W. D. KENNEDY, Director
<PAGE>
EXHIBIT 24.2
CERTIFICATE OF RESOLUTION
I, CLIFFORD N. HAIR, JR., Secretary of Costilla Energy, Inc., a Delaware
corporation, do hereby certify that the Board of Directors of Costilla Energy,
Inc., acting by unanimous written consent, duly adopted the following
resolutions as of July 1, 1996:
RESOLVED, that the directors and officers of the Corporation are
hereby authorized and directed to execute and deliver a Power of Attorney
to Michael J. Grella and Bobby W. Page in the following form:
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being certain of
the Officers and all of the Directors of Costilla Energy, Inc., a
Delaware Corporation, do hereby constitute and appoint MICHAEL J.
GRELLA and BOBBY W. PAGE, or either of them, with fully power of
substitution, our true and lawful attorneys and agents, to do any and
all acts and things in our names and in the capacities indicated which
MICHAEL J. GRELLA and BOBBY W. PAGE, or either of them, may deem
necessary or advisable to enable the Company to comply with the
Securities Act of 1933, as amended, any state securities laws, and any
rules, regulations, and requirements of the Securities and Exchange
Commission in connection with the Registration Statement seeking to
register shares of Common Stock, $.10 par value of Costilla Energy,
Inc., including specifically, but not limited to, the power and
authority to sign such Registration Statement, any and all amendments
(including post-effective amendments) to such Registration Statement,
and any other forms or documents related to such Registration
Statement which are required under federal or state securities laws
for us, or any of us, in our names in the capacities indicated; and we
do hereby ratify and confirm all that MICHAEL J. GRELLA and BOBBY W.
PAGE, or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in any number of
counterparts, and each such counterpart shall be considered an
original hereof.
RESOLVED, that the Officers of the Corporation are hereby authorized
and directed to take all such further action as they may deem advisable in
order to carry out the intent and purposes of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand on behalf of this
Corporation on this 15th day of July, 1996.
/s/ Clifford N. Hair, Jr.
--------------------------------
CLIFFORD N. HAIR, JR., Secretary
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) __
STATE STREET BANK AND TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-1867445
(JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
225 Franklin Street, Boston, Massachusetts 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
John R. Towers, Esq. Senior Vice President and Corporate Secretary
225 Franklin Street, Boston, Massachusetts 02110
(617)654-3253
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
_____________________
COSTILLA ENERGY, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2658940
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
_____________________
(SENIOR SUBORDINATED NOTES)
(TITLE OF INDENTURE SECURITIES)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington,
D.C., Federal Deposit Insurance Corporation, Washington, D.C.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its
parent, State Street Boston Corporation.
(See note on page 6.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission
as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility
and Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No. 22-17940)
and is incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee
to commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No.
1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE
DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange
Commission as Exhibit 3 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4
to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Eastern
Edison Company (File No. 33-37823) and is incorporated herein by
reference thereto.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4 IF THE OBLIGOR
IS IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the
Act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR
EXAMINING AUTHORITY.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority is annexed hereto as
Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility and Qualification
which relates to matters peculiarly within the knowledge of the obligor or
any underwriter for the obligor, the trustee has relied upon information
furnished to it by the obligor and the underwriters, and the trustee
disclaims responsibility for the accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which
would have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts,
has duly caused this statement of eligibility and qualification to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the City
of Boston and The Commonwealth of Massachusetts, on the 23RD DAY OF JULY,
1996.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Donald E. Smith
-----------------------------------
DONALD E. SMITH
VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by COSTILLA
ENERGY, INC.. of its Senior Subordinated Notes, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Donald E. Smith
-----------------------------------
DONALD E. SMITH
VICE PRESIDENT
DATED: JULY 23, 1996
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company of
Boston, Massachusetts and foreign and domestic subsidiaries, a state banking
institution organized and operating under the banking laws of this
commonwealth and a member of the Federal Reserve System, at the close of
business DECEMBER 31, 1995, published in accordance with a call made by the
Federal Reserve Bank of this District pursuant to the provisions of the
Federal Reserve Act and in accordance with a call made by the Commissioner of
Banks under General Laws, Chapter 172, Section 22(a).
Thousands of
ASSETS Dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin............. 1,331,827
Interest-bearing balances...................................... 5,971,326
Securities....................................................... 6,325,054
Federal funds sold and securities purchased under agreements
to resell in domestic offices of the bank and its Edge
subsidiary...................................................... 5,436,994
Loans and lease financing receivables:
Loans and leases, net of unearned
income................................. 4,308,339
Allowance for loan and lease losses..... 63,491
Loans and leases, net of unearned income and allowances........ 4,244,848
Assets held in trading accounts.................................. 1,042,846
Premises and fixed assets........................................ 374,362
Other real estate owned.......................................... 3,223
Investments in unconsolidated subsidiaries....................... 31,624
Customers' liability to this bank on acceptances outstanding..... 57,472
Intangible assets................................................ 68,384
Other assets..................................................... 670,058
----------
Total assets..................................................... 25,558,018
----------
----------
LIABILITIES
Deposits:
In domestic offices............................................ 6,880,231
Noninterest-bearing................... 4,728,115
Interest-bearing...................... 2,152,116
In foreign offices and Edge subsidiary......................... 9,607,427
Noninterest-bearing................... 28,265
Interest-bearing...................... 9,579,162
Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and of its Edge
subsidiary...................................................... 5,913,969
Demand notes issued to the U.S. Treasury and Trading
Liabilities..................................................... 530,406
Other borrowed money............................................. 493,191
Bank's liability on acceptances executed and outstanding......... 57,387
Other liabilities................................................ 620,287
----------
Total liabilities................................................ 24,102,898
----------
EQUITY CAPITAL
Common stock..................................................... 29,176
Surplus.......................................................... 228,448
Undivided profits................................................ 1,197,496
----------
Total equity capital............................................. 1,455,120
----------
Total liabilities and equity capital............................. 25,558,018
----------
----------
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true
and correct.
David A. Spina
Marshall N. Carter
Charles F. Kaye
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COSTILLA ENERGY, L.L.C. FOR YEARS ENDED DECEMBER 31,
1993, 1994, AND 1995 AND THE UNAUDITED PERIODS MARCH 31, 1995 AND 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 2,616 2,760
<SECURITIES> 0 0
<RECEIVABLES> 7,576 7,584
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,881 11,394
<PP&E> 83,479 88,569
<DEPRECIATION> (9,413) (11,281)
<TOTAL-ASSETS> 87,367 91,024
<CURRENT-LIABILITIES> 8,385 9,290
<BONDS> 71,494 74,494
11,320 11,678
0 0
<COMMON> 0 0
<OTHER-SE> (7,189) (7,535)
<TOTAL-LIABILITY-AND-EQUITY> 87,367 91,024
<SALES> 21,693 8,833
<TOTAL-REVENUES> 21,816 8,951
<CGS> 10,355 3,659
<TOTAL-COSTS> 12,005 3,887
<OTHER-EXPENSES> 6,097 1,986
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,454 1,704
<INCOME-PRETAX> (4,311) 12
<INCOME-TAX> 3 0
<INCOME-CONTINUING> (4,314) 12
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,314) 12
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
