<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996
REGISTRATION NO. 333-08909
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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. / /
------------------------
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>
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 SEPTEMBER 24, 1996
PRELIMINARY PROSPECTUS
$100,000,000
COSTILLA ENERGY, INC.
% SENIOR NOTES DUE 2006
-----------------
The % Senior 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 senior obligations of the Company and
will rank equally in right of payment with all other Senior Indebtedness (as
defined herein) of the Company, which will include borrowings under the Credit
Facility (as defined herein), but will be effectively subordinated to any
existing or future secured Senior Indebtedness. The Credit Facility is expected
to be secured by substantially all of the assets of the Company. As of June 30,
1996, on a pro forma basis after giving effect to the Corporate Reorganization,
the Offerings and the application of the proceeds therefrom, as described under
"Use of Proceeds", the Company would have had $0.4 million of secured Senior
Indebtedness. No indebtedness of the Company is expressly subordinated to the
Notes. Initially, both the Notes and the Credit Facility will be effectively
subordinated to liabilities of the Company's subsidiaries. On a pro forma basis,
the total liabilities of the Company's subsidiaries were $6.5 million at June
30, 1996, all of which were operating liabilities. 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 transfers 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 has been
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 10 FOR A DISCUSSION OF 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 has 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 $600,000.
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>
PRIMARY OPERATING AREAS
[A GEOGRAPHICAL MAP INDICATING WHERE THE COMPANY HAS
OIL AND GAS PROPERTIES AND OFFICES]
IN CONNECTION WITH THIS NOTES 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.
<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." "ADJUSTED EBITDA," AS USED
HEREIN, MEANS NET INCOME (LOSS), PLUS INTEREST, INCOME TAXES, DEPRECIATION,
DEPLETION AND AMORTIZATION, EXPLORATION AND ABANDONMENT COSTS AND EXTRAORDINARY
LOSS FROM EXTINGUISHMENT OF DEBT.
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 area of Texas and New Mexico, 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 an entity which has 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 April 1, 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 April 1, 1996. The Company also
has a substantial undeveloped acreage position consisting of 180,704 gross
(165,166 net) acres at June 30, 1996. The Company has identified in excess of
185 drilling locations of which 64 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 37 wells based on these
3-D surveys, 31 of which have been productive. The Company has recently
completed two additional 3-D surveys and intends to commence drilling on one of
these acreage blocks in the second half of 1996. The Company currently plans to
drill 63 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and Adjusted EBITDA. The Company increased its estimated proved
reserves from 6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at April 1, 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
$3.60 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 10,231 BOE for
the three months ended March 31, 1996 (pro forma for the 1996 Acquisition),
representing a compound annual growth rate of 190%. Adjusted 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 geographically diverse
portfolio of properties, the reserves attributable to which are approximately
balanced between oil and gas. 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 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 24 exploratory wells during the last half of 1996 and 36 exploratory
wells in 1997. Capital budgeted for exploration activities is $8.1 million
for the last six 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 $8.4 million
for the last six months of 1996 and $9.2 million for 1997, which includes
the drilling of 12 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 April 1, 1996, the Company operated
wells constituting approximately 72% 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 7.1 Mmbbls of oil and 44.1 Bcf of gas, aggregating
14.4 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.5 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At April 1, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,787 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 April 1, 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
(16,646 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 eight
wells located on the Company's Edwards/McElroy Ranch Prospect in the Permian
Basin. While one of such wells is being drilled, the remaining seven wells have
been completed as producers. Three of the productive wells have resulted in
separate field discoveries which have confirmed the Company's seismic
interpretation of a significant trend. Since beginning operations on this
prospect, the Company has drilled 11 producing wells and one dry hole. As a
result, the Company has identified up to 68 additional drilling locations, none
of which are included in the Company's proved reserves.
The Company has also continued drilling in the McGyver-Green Acres 3-D
Prospect. Since commencing activity in this prospect in July 1994 the Company
has drilled 17 wells, of which 14 have been successful. During June 1996, the
average daily capacity from the producing wells in this prospect was
approximately 83 BOE per well. The Company has identified 34 additional drilling
locations in the McGyver-Green Acres Prospect, nine of which are included in the
Company's proved reserves.
The Company has also drilled and completed seven 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 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 senior
obligations of the Company, and will rank
equally in right of payment with all other
Senior Indebtedness of the Company (including
the Credit Facility) and senior in right of
payment to all existing and future
Subordinated Indebtedness of the Company.
Borrowings under the Credit Facility are
expected to be secured by substantially all of
the assets of the Company and any subsidiary
of the Company that guarantees such
borrowings. Initially, no subsidiaries of the
Company will guarantee the obligations of the
Company under the Credit Facility. To the
extent of pledged collateral, such
Indebtedness will have priority over the
Notes. At June 30, 1996, on a pro forma basis
after giving effect to the Corporate
Reorganization, the Offerings and the
application of the net proceeds therefrom, the
Company would have had $0.4 million of secured
Senior Indebtedness and no other unsecured
Senior Indebtedness. The Notes also will be
effectively subordinated to all indebtedness
and other liabilities of the Company's
subsidiaries until such subsidiaries (the
'Subsidiaries Guarantors") deliver Subsidiary
Guarantees to fully and unconditionally
guarantee the Notes on a senior basis (the
"Subsidiary Guarantees"). At June 30,
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
1996, the subsidiaries' total liabilities were
$6.5 million, all of which were operating
liabilities. The Indenture pursuant to which
the Notes will be issued (the "Indenture")
requires each Subsidiary to deliver a
Subsidiary Guarantee as a condition to its
incurrence of Indebtedness (other than
intercompany Indebtedness). At the date of the
Indenture, there will be no Subsidiary
Guarantees. See "Description of Notes --
Ranking" and "-- Subsidiary Guarantees."
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 will restrict, among other
things, the Company's ability to incur
additional indebtedness, pay dividends or make
certain other restricted payments, incur
liens, 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, or enter into certain
transactions with affiliates.
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 information 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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------------
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 $ 5,573 $ 19,525 $ 28,748
Expenses:
Oil and gas production............................ 1,688 2,351 10,355 26,937 2,413 8,278 13,295
General and administrative........................ 952 1,184 3,571 4,850 1,008 2,809 3,010
Exploration and abandonments...................... 218 793 1,650 2,761 1,007 308 555
Depreciation, depletion and amortization.......... 884 1,847 5,958 14,176 1,367 4,620 6,981
Interest.......................................... 605 1,458 4,591 11,635 1,046 4,156 5,817
Other............................................. -- -- 2 2 -- -- --
Net income (loss) before income taxes and
extraordinary item................................. 50 203 (4,311) (7,724) (1,268) (646) (910)
Net income (loss)................................... 73 163 (4,314) (7,727) (1,268) (2,286) (910)
Pro forma earnings (loss) per common share.......... -- -- -- (0.78) -- -- (0.09)
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 -- $ (3,040) $ (122) --
Investing activities.............................. (6,731) (12,146) (62,467) -- (57,773) (49,723) --
Financing activities.............................. 6,315 10,618 58,830 -- 62,094 48,143 --
OTHER FINANCIAL DATA:
Capital expenditures................................ $ 6,862 $ 11,868 $ 62,220 -- $ 57,773 $ 49,723 --
Adjusted EBITDA (2)................................. 1,757 4,301 7,888 $ 20,848 2,152 8,438 $ 12,443
Adjusted EBITDA/interest expense (2)................ 2.9x 2.9x 1.7x 1.8x 2.1x 2.0x 2.1x
Ratio of earnings to fixed charges (3).............. 1.0 1.1 -- -- -- -- --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital..................................... $ 1,612 $ 1,081 $ 2,496 -- -- $ 4,266 $ 13,757
Total assets........................................ 13,290 24,904 87,367 -- -- 135,047 146,434
Total debt.......................................... 12,034 23,613 71,494 -- -- 122,365 100,365
Redeemable members' capital......................... -- -- 12,278 -- -- 13,557 --
Members' capital.................................... 51 (747) (8,147) -- -- (11,712) --
Pro forma stockholders' equity...................... -- -- -- -- -- -- 35,232
ACNTA (4)........................................... 200,923
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
June 30, 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) Adjusted EBITDA and the ratio of Adjusted EBITDA to interest expense are
presented because of their wide acceptance as financial indicators of a
company's ability to service or incur debt. Adjusted EBITDA (as used
herein) is calculated by adding interest, income taxes, depreciation,
depletion and amortization, exploration and abandonment costs and
extraordinary loss resulting from extinguishment of debt to net income
(loss). The ratio of Adjusted EBITDA to interest expense is calculated by
dividing Adjusted EBITDA by interest. Interest includes interest expense
accrued and amortization of deferred financing costs. Adjusted EBITDA and
the ratio of Adjusted EBITDA to interest expense should not be considered
as alternatives to earnings (loss), or operating earnings (loss), as
defined by generally accepted accounting principles, as indicators of the
Company's financial performance or to cash flow as a measure of liquidity.
(3) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) before extraordinary loss resulting from
extinguishment of debt, 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, $1,268,000 and $646,000
for the historical periods ended December 31, 1995, June 30, 1995 and June
30, 1996, respectively, and $7,724,000 and $910,000 for the pro forma
periods ended December 31, 1995 and June 30, 1996, respectively.
(4) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of Notes-- Certain Definitions."
8
<PAGE>
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF APRIL 1, 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 16,477
Gas (Mmcf)............................................. 21,619 27,512 78,152 79,420 112,921
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)...................... 19.8 14.4 13.6 -- --
RESERVE REPLACEMENT DATA:
Production replacement ratio (4)....................... 513% 540% 969% -- --
All-in finding costs per BOE (5)....................... $ 4.31 $ 3.67 $ 3.43 $ 2.84 $ 3.72
</TABLE>
- ------------------------------
(1) Gives effect to the 1996 Acquisition as if such transaction had occurred as
of April 1, 1996.
(2) Estimates of net proved oil and gas reserves at April 1, 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 $3.60 per BOE.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
SIX MONTHS ENDED JUNE 30,
HISTORICAL PRO FORMA(1) 1996
------------------------------- ------------- --------------------------
1993 1994 1995 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)................................... 158 330 950 2,085 709 990
Gas (Mmcf).................................... 865 1,600 4,806 11,984 3,504 5,345
MBOE.......................................... 302 597 1,751 4,083 1,293 1,881
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl)................................. $ 16.93 $ 15.25 $ 15.53 $ 15.75 $ 18.93 $ 18.26
Gas (per Mcf)................................. 1.82 1.63 1.45 1.59 1.91 1.87
COSTS PER BOE:
Production costs, including severance taxes
(2).......................................... $ 5.59 $ 3.94 $ 5.91 $ 6.60 $ 6.40 $ 7.07
Depreciation, depletion and amortization...... 2.93 3.09 3.40 3.47 3.57 3.71
</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 six months ended June 30, 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. Additionally, the
Company's 1995 production costs were adversely affected by expenses incurred
in connection with plugging wells to comply with applicable regulatory
requirements.
9
<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 June 30, 1996, as adjusted for the Corporate Reorganization, the
Offerings and the application of the net proceeds therefrom, the Company's total
debt and stockholders' equity would have been $100.4 million and $35.2 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 Credit Facility will afford the Company $50.0 million of
available borrowing capacity, none of which is expected to be necessary to
finance the Company's existing business plan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Other Indebtedness."
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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. Earnings were insufficient to cover fixed charges by $4.3
million and $0.6 million for the year ended December 31, 1995 and six months
ended June 30, 1996, respectively, and $7.7 million and $0.9 million for the pro
forma year ended December 31, 1995 and six months ended June 30, 1996,
respectively. Based upon the current and anticipated level of operations, the
Company believes, however, 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. The inability to obtain additional
financing could have a material adverse effect on the Company. For example, a
default by the Company under the terms of the Indenture could result in a
default under the terms of the Credit Facility.
EFFECTIVE SUBORDINATION OF NOTES
The obligations of the Company and any subsidiary of the Company that
guarantees the obligations of the Company under the Credit Facility are expected
to be secured by substantially all of the assets of the Company and such
subsidiary. Holders of secured Indebtedness of the Company and its subsidiaries,
including the lenders under the Credit Facility, have claims with respect to the
assets constituting collateral for such Indebtedness that are prior to the
claims of holders of the Notes. In the event of a default on such Indebtedness,
or a bankruptcy, liquidation or reorganization of the Company and its
subsidiaries, such assets will be available to satisfy obligations with respect
to the
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<PAGE>
Indebtedness secured thereby before any payment therefrom could be made on the
Notes. Accordingly, the Notes will be effectively subordinated to claims of
secured creditors of the Company and its subsidiaries to the extent of such
pledged collateral. As of June 30, 1996, after giving pro forma effect to the
Corporate Reorganization, the Offerings and the application of the net proceeds
therefrom, the Company would have had $0.4 million of secured Senior
Indebtedness outstanding and will have $50.0 million available under the Credit
Facility. See "Description of Notes -- Ranking."
The Indenture does not require the Subsidiaries to guarantee the payment of
the Notes unless the Subsidiaries incur Indebtedness (other than intercompany
Indebtedness). The Indenture prohibits Subsidiaries that are not Subsidiary
Guarantors from incurring Indebtedness. The Notes will be effectively
subordinated to claims of creditors (other than the Company) of the Subsidiaries
that are not Subsidiary Guarantors, including trade creditors, taxing
authorities and tort claimants. Such creditors generally will have priority as
to the assets of such Subsidiaries over the claims and equity interests of the
Company and, thereby indirectly, the holders of indebtedness of the Company,
including the Notes. At June 30, 1996, on a pro forma basis, the Company's
Subsidiaries had $6.5 million of liabilities, all of which were operating
liabilities. Any Subsidiary Guarantees will be effectively subordinated in right
of payment to all existing and future secured Senior Indebtedness of the
Subsidiary Guarantors. On the date of the Indenture there will be no Subsidiary
Guarantees. See "Description of Notes -- Ranking," "-- Subsidiary Guarantees"
and "-- Incurrence of Indebtedness and Preferred Stock."
SUBSIDIARY GUARANTEES MAY TERMINATE; FRAUDULENT CONVEYANCE CONSIDERATIONS
RELATING TO SUBSIDIARY GUARANTEES
The Indenture does not require any Subsidiary to guarantee the Notes unless
such Subsidiary incurs Indebtedness (other than intercompany Indebtedness). On
the date of the Indenture there will be no Subsidiary Guarantees. 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 that may be delivered. To the extent that a court were to
find that (x) a Subsidiary Guarantee was incurred with the intent to hinder,
delay or 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
11
<PAGE>
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.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER AND ASSET SALE OFFER
The Company must offer to purchase the Notes upon the occurrence of certain
events. The Indenture 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.
In the event of certain asset dispositions, the Company will be required under
certain circumstances to use the Excess Proceeds (as defined) to offer to
purchase the Notes at 100% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. See "Description of Notes -- Repurchase
at the Option of Holders."
The Credit Facility prohibits the Company from prepaying the Notes,
including prepayments pursuant to a Change of Control or Asset Sale. Prior to
commencing such an offer to purchase, the Company may be required to (i) repay
in full all indebtedness of the Company that would prohibit the repurchase of
the Notes including that under the Credit Facility, or (ii) obtain any requisite
consent to permit the repurchase. If the Company is unable to repay all of such
indebtedness or is unable to obtain the necessary consents, then the Company
will be unable to offer to purchase the Notes, and such failure will constitute
an Event of Default under the Indenture. It is unlikely that the Company would
have sufficient internally generated funds available at the time of any Change
of Control or Asset Sale Offer to satisfy all of its debt obligations (including
repurchases of the Notes and payment of the Credit Facility) simultaneously
without refinancing the indebtedness.
The events that constitute a Change of Control or require an Asset Sale
Offer under the Indenture may also be events of default under the Credit
Facility or other senior indebtedness of the Company and the Subsidiaries. Such
events may permit the lenders under such debt instruments to accelerate the debt
and, if the debt is not paid, to enforce security interests on substantially all
the assets of the Company and the Subsidiaries, thereby limiting the Company's
ability to raise cash to repurchase the Notes, and reducing the practical
benefit of the offer to purchase provisions to the holders of the Notes. In
addition, the Change of Control covenant in the Indenture could have the effect
of discouraging a takeover of the Company by making such an attempt potentially
more expensive.
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. Although the
Company believes such estimates to be reasonable, 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
12
<PAGE>
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 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. A&P also owes the Company $247,000, which is represented by a
promissory note payable upon demand. See "Certain Transactions."
13
<PAGE>
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 within the initial three-year term of each employment agreement. 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.
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.
14
<PAGE>
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."
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". 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
15
<PAGE>
"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.
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 an entity which has 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"). Costilla has been formed solely for the purpose of
conducting the Offerings, and has not commenced operations. 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 $15.5 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, Inc., 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 Corporation, 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 40.5% interest in a Delaware 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
Concurrent with the 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.
16
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offerings are estimated to be $151.5 million,
assuming an initial public offering price of $15 per share in the Common Stock
Offering ($159.8 million if the underwriters' over-allotment option with respect
to the Common Stock Offering is exercised). Approximately $125.8 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
$30.0 million of the Existing Debt currently bears interest at 14.0% per annum
(increasing to 14.5% on September 13, 1996) 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, $20.5 million of the net
proceeds will be used to pay certain amounts incurred in connection with the
Corporate Reorganization, including $15.5 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 $5.1 million will be used by the Company for
general corporate purposes. Pending such uses, the remaining net proceeds will
be invested in short-term, investment grade, interest-bearing securities.
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.......................................... $ 125.8
Redeem membership interests...................................... 15.5
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.................................................. 5.1
Estimated fees, commissions, underwriting discounts and expenses
related to the Offerings........................................ 8.6
---------
$ 160.0
---------
---------
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1996, on an historical basis and on a pro forma basis giving
effect to the Corporate Reorganization and the Offerings and the application of
the net proceeds therefrom, as if such transactions had been consummated as of
June 30, 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>
JUNE 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Existing debt......................................................................... $ 122,365 $ 365
Credit Facility....................................................................... -- --
% Senior Notes due 2006............................................................ -- 100,000
----------- -----------
Total long-term debt.................................................................... 122,365 100,365
----------- -----------
Redeemable members' capital............................................................. 13,557 --
----------- -----------
Members' capital and stockholders' equity:
Members' capital...................................................................... (11,712) --
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....................................................................... -- 34,232
----------- -----------
Total members' capital and stockholders' equity......................................... (11,712) 35,232
----------- -----------
Total capitalization.................................................................... $ 124,210 $ 135,597
----------- -----------
----------- -----------
</TABLE>
18
<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 June 30, 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.
19
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED BALANCE SHEET -- UNAUDITED
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COSTILLA
COSTILLA OFFERING ENERGY,
ASSETS L.L.C. ADJUSTMENTS INC.
- ----------------------------------------------------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 1,164 $ (700)(1) $ 10,655
151,450(3)
(141,259)(4)
Accounts receivable.................................................. 8,785 8,785
Prepaid and other current assets..................................... 2,629 2,629
------------- -----------
Total current assets............................................. 12,578 22,069
Oil and gas properties, using the successful efforts method of
accounting:
Proved properties.................................................... 126,809 126,809
Unproved properties.................................................. 4,615 4,615
Accumulated depreciation, depletion and amortization................. (13,933) (13,933)
------------- -----------
117,491 117,491
Other property and equipment, net...................................... 1,640 700(1) 2,340
Deferred charges (Note 2).............................................. 2,654 3,850(3) 3,850
(2,654)(4)
Note receivable -- affiliate........................................... 684 684
------------- -----------
$ 135,047 $ 146,434
------------- -----------
------------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND EQUITY
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt................................. $ 98 $ 98
Trade accounts payable............................................... 4,587 4,587
Undistributed revenue................................................ 1,524 1,524
Other current liabilities............................................ 2,103 2,103
------------- -----------
Total current liabilities........................................ 8,312 8,312
Long-term debt, less current maturities................................ 122,267 100,000(3) 100,267
(122,000)(4)
Deferred income........................................................ 2,623 2,623
------------- -----------
Total liabilities................................................ 133,202 111,202
Redeemable members' capital............................................ 13,557 (13,557)(4) --
Members' capital and stockholders' equity:
Members' capital..................................................... (11,712) 11,712(2) --
Preferred stock, $.10 par value (3,000,000 shares authorized; no
shares outstanding)................................................. -- --
Common Stock, $.10 par value (20,000,000 shares authorized; no shares
outstanding historical, 10,000,000 shares outstanding pro forma).... -- 1,000(3) 1,000
Paid-in capital...................................................... -- (2,654)(4) 34,232
(1,443)(4)
(4,259)(4)
54,300(3)
(11,712)(2)
------------- -----------
Total members' capital and stockholders' equity...................... (11,712) 35,232
------------- -----------
$ 135,047 $ 146,434
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
20
<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)(1) 26,937
General and administrative............ 3,571 -- -- (172)(1) 4,850
1,451(5)
Exploration and abandonments.......... 1,650 109 1,002 2,761
Depreciation, depletion and
amortization......................... 5,958 -- -- 100(1) 14,176
8,118(6)
Interest.............................. 4,591 -- -- 10,046(7) 14,637 $ 14,637(8)
11,635(8)
Other................................. 2 -- -- 2
------------- ----------- ----------- -------------
26,127 5,582 12,411 63,363
------------- ----------- ----------- -------------
Net income (loss) before federal income
taxes.................................. (4,311) 5,348 7,480 (10,726)
Provision for federal income taxes...... 3 -- -- 3
------------- ----------- ----------- -------------
Net income (loss)....................... $ (4,314) $ 5,348 $ 7,480 $ (10,729)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Net 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 abandonments.......... 2,761
Depreciation, depletion and
amortization......................... 14,176
Interest.............................. 11,635
Other................................. 2
-----------
60,361
-----------
Net income (loss) before federal income
taxes.................................. (7,724)
Provision for federal income taxes...... 3
-----------
Net income (loss)....................... $ (7,727)
-----------
-----------
Net loss per share...................... $ (0.78)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRE OFFERING PRO FORMA COSTILLA
COSTILLA 1996 PRO FORMA COSTILLA OFFERING ENERGY,
L.L.C. ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS INC.
------------- ----------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 19,525 $ 9,223 $ 28,748 $ 28,748
Expenses:
Oil and gas production................. 8,278 5,167 $ (150)(1) 13,295 13,295
General and administrative............. 2,809 (86)(1) 3,010 3,010
287(5)
Exploration and abandonments........... 308 247 555 555
Depreciation, depletion and
amortization.......................... 4,620 50(1) 6,981 6,981
2,311(6)
Interest............................... 4,156 2,832(7) 6,988 $ (6,988)(8) 5,817
5,817(8)
------------- ----------- ------------- -----------
20,171 5,414 30,829 29,658
------------- ----------- ------------- -----------
Net income (loss) before federal income
taxes................................... (646) 3,809 (2,081) (910)
------------- ----------- ------------- -----------
Net income (loss)........................ $ (646) $ 3,809 $ (2,081) $ (910)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Net income (loss) per share.............. $ (0.09)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
22
<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 June 30, 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 June 30, 1996 and the
related consolidated statements of operations for the year ended
December 31, 1995 and the six months ended June 30, 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
period from January 1, 1995 to June 14, 1996 (date of the 1996
Acquisition).
NOTE 2. -- PRO FORMA ENTRIES
(1) 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.
(2) To reflect the Corporate Reorganization including the transfer of
members' capital to stockholders' equity.
(3) To reflect the issuance of 4,000,000 shares of Common Stock at an
estimated price of $15.00 per share for estimated proceeds of $55,300,000, 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
$3,850,000.
(4) To record the repayment of the Existing Debt and the write-off of
related debt issuance costs, the distribution of cash to certain members, and
the repurchase of redeemable members capital for approximately $15,000,000 from
proceeds of the Offerings.
The redemption amount is composed of the following:
<TABLE>
<S> <C>
Redeemable members' interest subject to preferred return...... $11,000,000
Redeemable members' interest not subject to preferred
return....................................................... 1,500,000
Accrued 15% preferred return including associated 10%
redemption premium........................................... 2,500,000
-----------
$15,000,000
-----------
-----------
</TABLE>
(5) Estimated incremental general and administrative expenses necessary to
administer the properties acquired in the 1995 and 1996 acquisitions and
increased public reporting and administration costs include salary and benefits
for one executive level employee and revised compensation arrangements for the
remaining executives, approximately 29 additional administrative personnel (the
majority of which were added prior to December 31, 1995), directors' fees,
insurance coverage and estimated costs to administer shareholder communications.
23
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. -- PRO FORMA ENTRIES (CONTINUED)
(6) 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 June 14, 1996 (date of the 1996
Acquisition).
(7) 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 from January 1, 1995 to June 14, 1996 (date of the 1996
Acquisition). The adjustment also reflects adjusted interest expense due to the
Existing Debt. Also included is the amortization of estimated debt issuance
costs of $2,728,000 over a three-year period.
Incremental interest expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Additional interest on borrowings associated with the
1995 Acquisition for the period of January 1 to June
12, 1995 (Average rate 10.0%).......................... $ 2,350 $ --
Additional interest on borrowings for the 1996
Acquisition through June 14, 1996 (including Tranche B
interest ranging from 14% to 16.5%).................... 6,750 2,300
Adjustment of average interest rate on previously
existing debt and amortization of loan fees............ 946 532
-------- -------
$ 10,046 $ 2,832
-------- -------
-------- -------
</TABLE>
(8) To reverse interest on the Existing Debt and to adjust interest expense
to reflect issuance of the Notes at 11.25% plus the amortization of estimated
debt issuance costs over 10 years ($385,000 annually).
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 June 30,
1996, the pro forma tax basis of the Company's assets and liabilities exceeded
the pro forma book basis by approximately $5,000,000. 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 LOSS PER SHARE
Net 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 April 1, 1996.
24
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
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 April 1, 1996.
The pro forma information assumes that both the 1995 Acquisition and the 1996
Acquisition took place on January 1, 1995.
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..................................... 437 2,615
Extensions and discoveries.......................................... 592 296
Production.......................................................... (492) (2,634)
------- -----------
Balance, April 1, 1996................................................ 16,477 112,921
------- -----------
------- -----------
Proved Developed Reserves:
December 31, 1995................................................... 13,235 87,345
April 1, 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.
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
25
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
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........................................................ $ 516,515 $ 572,426
Future costs:
Production............................................................. (239,388) (253,348)
Development............................................................ (20,907) (22,076)
------------ --------------
Future net cash flows before income taxes (a)............................ 256,220 297,002
Future income taxes...................................................... (48,735) (63,418)
------------ --------------
Future net cash flows.................................................... 207,485 233,584
10% annual discount for estimated timing of cash flows................... (66,851) (76,359)
------------ --------------
Standardized measure of discounted net cash flows........................ $ 140,634 $ 157,225
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(a) Present value of estimated future net cash flows, before income taxes would
be $155,984 and $179,527 as of December 31, 1995 and March 31, 1996,
respectively.
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>
26
<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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
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 $ 2,362 $ 4,231 $ 7,637 $ 21,693 $ 5,568 $ 19,445
Total revenues.......................... 2,134 2,887 4,397 7,836 21,816 5,573 19,525
Expenses:
Oil and gas production................ 769 1,340 1,688 2,351 10,355 2,413 8,278
General and administrative............ 354 388 952 1,184 3,571 1,008 2,809
Exploration and abandonments.......... 106 4 218 793 1,650 1,007 308
Depreciation, depletion and
amortization......................... 494 404 884 1,847 5,958 1,367 4,620
Interest.............................. 179 365 605 1,458 4,591 1,046 4,156
Other................................. -- -- -- -- 2 -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item..................... 232 386 50 203 (4,311) (1,268) (646)
Net income (loss)....................... 234 368 73 163 (4,314) (1,268) (2,286)
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities.................. $ 276 $ 140 $ 322 $ 1,527 $ 6,366 $ (3,040) $ (122)
Investing activities.................. (2,659) (1,432) (6,731) (12,146) (62,467) (57,773) (49,723)
Financing activities.................. 2,440 1,450 6,315 10,618 58,830 62,094 48,143
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 3,092 $ 3,720 $ 6,862 $ 11,868 $ 62,220 $ 57,773 $ 49,723
Distributions to members................ -- -- 456 961 55 55 --
Adjusted EBITDA (1)..................... 1,011 1,159 1,757 4,301 7,888 2,152 8,438
Adjusted EBITDA/interest expense (1).... 5.6x 3.2x 2.9x 2.9x 1.7x 2.1x 2.0x
Ratio of earnings to fixed charges
(2).................................... 1.3 1.5 1.0 1.1 -- -- --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital......................... $ (580) $ 185 $ 1,612 $ 1,081 $ 2,496 -- $ 4,266
Total assets............................ 4,602 6,675 13,290 24,904 87,367 -- 135,047
Total debt.............................. 3,610 5,352 12,034 23,613 71,494 -- 122,365
Redeemable members' capital............. -- -- -- -- 12,278 -- 13,557
Members' capital........................ 504 434 51 (747) (8,147) -- (11,712)
</TABLE>
- ------------------------------
(1) Adjusted EBITDA and the ratio of Adjusted EBITDA to interest expense are
presented because of their wide acceptance as financial indicators of a
company's ability to service or incur debt. Adjusted EBITDA (as used herein)
is calculated by adding interest, income taxes, depreciation, depletion and
amortization, exploration and abandonment costs and extraordinary loss
resulting from extinguishment of debt to net income (loss). The ratio of
Adjusted EBITDA to interest expense is calculated by dividing Adjusted
EBITDA by interest. Interest includes interest expense accrual and
amortization of deferred financing costs. Adjusted EBITDA and the ratio of
Adjusted EBITDA to interest expense should not be considered as alternatives
to earnings (loss), or operating earnings (loss), as defined by generally
accepted accounting principles, as indicators of the Company's financial
performance or to cash flow as a measure of liquidity.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) before extraordinary loss resulting from
extinguishment of debt, 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, $1,268,000 and $646,000 for the
historical periods ended December 31, 1995, June 30, 1995 and June 30, 1996,
respectively.
27
<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 Adjusted 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (MBbls)....................................... 158 330 950 233 709
Gas (Mmcf)........................................ 865 1,600 4,806 1,233 3,504
MBOE.............................................. 302 597 1,751 438 1,293
AVERAGE SALES PRICES (1):
Oil (per Bbl)..................................... $ 16.93 $ 15.25 $ 15.53 $ 16.12 $ 18.93
Gas (per Mcf)..................................... 1.82 1.63 1.45 1.46 1.91
PRODUCTION COST (2):
Per BOE (3)....................................... $ 5.59 $ 3.94 $ 5.91 $ 5.51 $ 6.40
Per dollar of sales............................... 0.40 0.31 0.48 0.43 0.43
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE........................................... $ 2.93 $ 3.09 $ 3.40 $ 3.12 $ 3.57
Per dollar of sales............................... 0.21 0.24 0.27 0.25 0.24
</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.
(3) Production costs per BOE in 1995 and for the six months ended June 30, 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.
Additionally, the Company's 1995 production costs were adversely affected
by expenses incurred in connection with plugging wells to comply with
applicable regulatory requirements.
28
<PAGE>
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. If market prices of oil and gas exceed the strike price of
put options, the options will expire unexercised, therefore, reducing the
effective price received for oil and gas sales by the cost of the related
option. Conversely, if market prices of oil and gas decline below the strike
price of put options, the options will be exercised, therefore, increasing the
effective price received for oil and gas sale by the proceeds received from the
related option. The net effect of the Company's commodity hedging activities
reduced oil and gas revenues by $9,000, $80,000, $80,000 and $854,000,
respectively, for the years ended December 31, 1994 and 1995, and the six months
ended June 30, 1995 and 1996 and increased oil and gas revenues by $71,000 for
the year ended December 31, 1993. See "Business and Properties -- Risk
Management."
The Company utilizes interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate, long term debt. If
market rates of interest experienced during the applicable swap term are below
the rate of interest effectively fixed by the swap agreement, the rate of
interest incurred by the Company will exceed the rate that would have been
experienced under the Credit Agreement. The net effect of the Company's interest
rate hedging activities increased interest expense by $8,000 for the year ended
December 31, 1995 and $359,000 for the six months ended June 30, 1996.
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
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company's total oil and gas revenues for the six months ended June 30,
1996 were $19,445,000, representing an increase of $13,877,000 (249%) over
revenues of $5,568,000 for the comparable period in 1995. This increase was
primarily due to the 1995 Acquisition which accounted for approximately
$12,300,000 of the revenue increase. Prior to accounting for the impact of the
1995 Acquisition and the 1996 Acquisition, the Company's total oil and gas
revenues for the six months ended June 30, 1996 increased by $658,000 (12%) over
the same period in 1995.
Oil and gas production was 1,293 MBOE in the 1996 period compared to 438
MBOE in the 1995 period. Of the 855 MBOE increase, approximately 800 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 $40,000 for the six months ended June 30,
1996 compared to $5,000 for the comparable period in 1995, representing an
increase of $35,000, which was primarily
29
<PAGE>
comprised of an increase in interest income of $33,000 in 1996 due to increased
funds earning interest. Also in the 1996 period, the Company realized gains of
$40,000 on various transactions for which there were no comparable transactions
for the six months ended June 30, 1995.
Oil and gas production costs in the 1996 period were $8,278,000 ($6.40 per
BOE), compared to $2,413,000 in 1995 ($5.51 per BOE), representing an increase
of $5,865,000 (243%), due principally to the 1995 Acquisition. On a per BOE
basis, production costs increased $0.89 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.
General and administrative expense for the six months ended June 30, 1996
was $2,809,000, representing an increase of $1,801,000 (179%) from the
comparable period in 1995 of $1,008,000. 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 $308,000 in the 1996 period
compared to $1,007,000 in 1995. The Company incurred $4,000 of seismic costs for
the six months ended June 30, 1996, compared to $514,000 which were incurred for
the comparable period in 1995. Dry hole costs decreased from $493,000 to
$304,000 for the comparable periods in 1995 and 1996, respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$4,620,000 compared to $1,367,000 for the 1995 period, representing an increase
of $3,253,000 (238%). During 1996, depreciation, depletion and amortization on
oil and gas production was provided at an average rate of $3.57 per BOE compared
to $3.12 per BOE for 1995. The increase was due primarily to the 1995
Acquisition.
Interest expense was $4,156,000 in the 1996 period, compared to $1,046,000
for the comparable period in 1995. The $3,110,000 (297%) increase was
attributable primarily 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 $77,646,000 and
$25,145,000, respectively.
Results of operations for the six months ended June 30, 1996 include an
extraordinary charge of $1,640,000 related to the early extinguishment of the
Company's previous credit agreement. The charge consisted of previously
capitalized debt issuance costs. The previous credit agreement was replaced by
the Existing Debt.
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 $13,373,000 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 in
connection with properties acquired in late 1994.
30
<PAGE>
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 $5,958,000
compared to $1,847,000 for 1994, representing an increase of $4,111,000 (233%).
During 1995, depreciation, depletion and amortization on oil and gas production
was provided at an average rate of $3.40 per BOE compared to $3.09 per BOE for
1994. The increase was due primarily to the 1995 Acquisition.
Interest expense was $4,591,000 in 1995 compared to $1,458,000 in 1994. The
$3,133,000 (215%) 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
NET CASH USED IN OPERATING ACTIVITIES
For the six months ended June 30, 1996, net cash used in operating
activities decreased to $0.1 million from $3.0 million for the comparable period
in 1995. Cash provided by operations, before
31
<PAGE>
changes in operating assets and liabilities, increased to $4.2 million from $0.1
million for the comparable period in 1995 due primarily to the 1995 Acquisition
and the increase in results of operations therefrom.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for the six months ended June 30, 1996
was $49.7 million. Approximately $42.5 million was used for the 1996
Acquisition, $5.2 million was used for other oil and gas expenditures and $2.0
million was used for other property and equipment. For the year ended December
31, 1995, net cash used in investing activities was $62.5 million. Approximately
$46.6 million was used for the 1995 Acquisition, $14.9 million for additional
acquisitions of producing oil and gas properties and exploration and development
activities and $1.0 million primarily for other property and equipment.
NET CASH PROVIDED BY FINANCING ACTIVITIES
The Company entered into a $125.0 million senior credit agreement in June
1996, against which $122.0 million was initially funded. Approximately $74.5
million was for the extension and refinancing of prior debt, $42.5 million was
used for the 1996 Acquisition and approximately $5.0 million was used for
general corporate purposes.
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 $10.0 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.
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 believes that cash flow from operations 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. The Company's historical and pro forma earnings
for the year ended December 31, 1995 and the six months ended June 30, 1996 were
insufficient to cover fixed charges. Although the Company's earnings were
insufficient to cover fixed charges for these periods, the Company does not have
covenants in the Indenture or the Credit Facility requiring the Company to
maintain a specific ratio of earnings to fixed charges. However, if the Company
is unable to generate sufficient cash flow from operations to service its debt,
it may be required to refinance all or a portion of its 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. See "Risk Factors -- Significant Leverage and Debt Service."
The Company has received a commitment from NationsBank of Texas, N.A. (the
"Bank") to provide the Credit Facility to the Company following the Offerings.
The Credit Facility will provide for a revolving line of credit with the
availability of funds and letters of credit being subject to a borrowing base
determination at least semiannually. The borrowing base will provide for a
maximum availability of $50.0 million (which amount is also expected to be the
initial borrowing base), none of which is expected to be outstanding immediately
following the Offerings. Availability under the borrowing base is initially
limited to $20.0 million for working capital and $30.0 million for acquisitions
of oil and
32
<PAGE>
gas properties meeting certain criteria established by the Bank. Borrowings
under the Credit Facility will bear interest at the Company's option at a
floating rate which is at or above the NationsBank, N.A. prime rate or the LIBOR
rate, depending on the percentage of committed funds which have been borrowed.
Interest will be payable quarterly and principal will be amortized in twelve
equal installments commencing two years following the execution of definitive
loan documents. Under the Credit Facility, the Company will be obligated to pay
certain fees to the Bank, including a commitment fee based on the unused portion
of the commitment. The Credit Facility will contain customary restrictive
covenants (including restrictions on the payment of dividends and the incurrence
of additional indebtedness) and will require the Company to maintain a current
ratio of not less than 1.0 to 1.0, a ratio of Adjusted EBITDA to interest
expense of not less than 2.0 to 1.0 and a minimum tangible net worth. At June
30, 1996, on a pro forma basis, the Company's current ratio would have been 2.7
to 1.0, the ratio of Adjusted EBITDA to interest expense would have been 2.1 to
1.0 and the Company would have exceeded the tangible net worth test by $1.4
million. The Company believes it will be in compliance with such covenants on
the date of closing of the Offerings. Borrowings under the Credit Facility will
be secured by substantially all of the assets of the Company and any subsidiary
of the Company that guarantees the Company's obligations under the Credit
Facility. Initially, no subsidiaries of the Company will guarantee the Company's
obligations under the Credit Facility. The Bank's commitment is subject to
certain conditions, including completion of the Offerings and the Corporate
Reorganization and application of the net proceeds therefrom to repay the
Company's prior secured indebtedness. See "Use of Proceeds."
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.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs...................................... $ -- $ -- $ 158 $ 607
Exploration costs...................................... 2,017 2,167 5,627 3,881
Acquisition costs:
Unproved properties.................................. 829 1,232 1,742 1,712
Proved properties.................................... 4,665 9,649 52,470 41,791
--------- --------- --------- -------------
Total.................................................. $ 7,511 $ 13,048 $ 59,997 $ 47,991
--------- --------- --------- -------------
--------- --------- --------- -------------
</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 $5.2 million was expended for exploration and
development activities during the six months ended June 30, 1996.
DELIVERY COMMITMENT
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.
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 area of Texas and New Mexico, 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 an entity which has 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 April 1, 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 April 1, 1996.
The Company also has a substantial undeveloped acreage position consisting of
180,704 gross (165,166 net) acres at June 30, 1996. The Company has identified
in excess of 185 drilling locations of which 64 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 37 wells based on these
3-D surveys, 31 of which have been productive. The Company has recently
completed two additional 3-D surveys and intends to commence drilling on one of
these acreage blocks in the second half of 1996. The Company currently plans to
drill 63 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and Adjusted EBITDA. The Company increased its estimated proved
reserves from 6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at April 1, 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
$3.60 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 10,231 BOE for
the three months ended March 31, 1996 (pro forma for the 1996 Acquisition),
representing a compound annual growth rate of 190%. Adjusted 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 geographically diverse
portfolio of properties, the reserves attributable to which are approximately
balanced between oil and gas. 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 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
34
<PAGE>
known producing regions. The Company plans to drill 24 exploratory wells
during the last half of 1996 and 36 exploratory wells in 1997. Capital
budgeted for exploration activities is $8.1 million for the last six 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 $8.4 million
for the last six months of 1996 and $9.2 million for 1997, which includes
the drilling of 12 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 April 1, 1996, the Company operated wells
constituting approximately 72% 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 7.1 Mmbbls of oil and 44.1 Bcf of gas, aggregating
14.4 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 April 1, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,787 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 April 1, 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
(16,646 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 April 1, 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
REGION 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..................................................... 428 697 6,395 1,762 5.0
--------- --------- --------- ----------- -----
Total..................................................... 3,522 16,477 112,921 35,297 100.0%
--------- --------- --------- ----------- -----
--------- --------- --------- ----------- -----
</TABLE>
PERMIAN BASIN. At April 1, 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 68 drilling locations on the Company's 11,513 gross (5,066 net)
acres in this prospect based on 3-D seismic data. Since January 1, 1996, the
Company has drilled seven successful wells on this prospect, three of which have
resulted in three separate field discoveries. In addition, these wells have
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 Production Inc. ("Texaco"). One additional well is being drilled
on seismic delineated features. The Company plans to drill 21 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 producing wells drilled
through June 30, 1996 are producing an aggregate of approximately 80 Bbls of oil
per day and the Company has participated in the drilling of two additional
productive wells subsequent to June 30, 1996. Drilling of six additional Queen
Sand 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 34 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. From completion to June 30, 1996, the well produced 61
MBbls of oil and 238 Mmcf of gas, and had average capacity of 71 Bbls of oil per
day and 278 Mcf of gas per day during June 1996. Subsequent to the first well,
16 additional wells have been drilled on this prospect of which 13 are
productive. The Company is drilling or intends to drill five additional wells
during the balance of 1996 on its 9,801 gross (7,057 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:
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
36
<PAGE>
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 up to 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 completed
another 3-D seismic project 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. An exploratory well is scheduled on this prospect
for the first quarter of 1997.
Two examples of the Company's current exploitation efforts in the Permian
Basin include:
EAST GOLDSMITH FIELD C02 PROJECT, ECTOR COUNTY, TEXAS. The Company owns
3,053 gross (2,656 net) acres in this field located 20 miles northwest of
Midland, Texas. Since its discovery, the field has produced in excess of 20
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
approximately 68 Bbls of oil per day and 225 Mcf of gas per day in July 1996.
With only two workovers and the new horizontal well, the Company has increased
Susan Peak production from approximately 31 Bbls of oil per day and 760 Mcf of
gas per day in the last half of 1995 to an average rate of approximately 126
Bbls of oil per day and 1,330 Mcf of gas per day in July 1996. 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 is 50%.
GULF COAST. At April 1, 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 and 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%. The Company is currently
attempting to acquire additional acreage in this prospect prior to initiating a
3-D survey in late 1996 or 1997.
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 122 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 are to conduct a 3-D survey in the Speaks area in late 1996
or 1997. The Company's working interest in this prospect is approximately 50%.
37
<PAGE>
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 providing opportunity for further
development. The Company's lease in the Borchers Field area has produced a total
of 21.2 Bcf of gas from two Wilcox sands. Costilla has a 100% working interest
in this field consisting of 1,322 gross and net acres. The Company plans to
conduct a 3-D survey in the Borchers Field in 1997.
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
capacity, 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 10,900 foot test well on the
Josey Ranch lease to test the Wilcox formation. The well was completed in April
1996 and has consistently produced approximately 1,000 Mcf of gas per day. The
Josey Ranch lease covers 1,661 gross (650 net) acres, and the Company's working
interest in this prospect is approximately 39%.
PERSONVILLE, LIMESTONE COUNTY, TEXAS. The Company has recently completed an
11,000 foot Cotton Valley well, which is producing 2.8 Mmcf of gas per day. The
Company is currently drilling an additional well on this prospect. Costilla
leases 411 gross (119 net) acres in this prospect, and has identified one
additional drilling location. The Company is the operator of this prospect and
its working interest is approximately 29%.
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 April 1, 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.
The Company has a number of opportunities in the Rocky Mountain region
involving 3-D seismic surveys, exploratory drilling and exploitation activities.
Examples of each of these opportunities are:
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 179 Bbls of oil
per day since its acquisition in June 1995 to 368 Bbls of oil per day in June
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 October 1996 that will be drilled
to 10,500 feet, a depth sufficient to test several different formations.
Costilla leases 5,169 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 4,640 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 reserves to any undeveloped acres. As gas prices improve, the Company
plans to drill additional wells on the prospect.
38
<PAGE>
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 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
1,778 Bbls of oil per day for June 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. While these arrangements have the
effect of increasing the net price the Company receives for its crude oil, such
arrangements do not have the effect of limiting the Company's exposure to
movements in crude oil prices. The Company markets its gas production at the
lease level pursuant to month-to-month contracts. Phibro Energy USA, Inc.'s
purchases of the Company's oil production for the year ended December 31, 1995
accounted for 17.7% of the Company's 1995 consolidated revenues. Because of the
number of crude oil purchasers, the Company does not anticipate any difficulty
in replacing Phibro Energy USA, Inc.
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 1996 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 52%
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 84% 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 April 1, 1996 were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------ PRO FORMA
APRIL 1,
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 6,851 430 7,930
Proved undeveloped........... 580 8,351 1,377 11,172 2,222 20,759 2,925 28,552
----- --------- --------- --------- --------- --------- --------- ---------
Total proved............... 2,365 21,619 4,009 27,512 10,788 78,152 16,477 112,921
----- --------- --------- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Assumes that the 1996 Acquisition had been consummated at April 1, 1996.
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------------------- APRIL 1,
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 April 1, 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 of the Company's engineering analysis covering approximately 54.0%
of the Company's proved reserves at such date. The pro forma estimates for April
1, 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
40
<PAGE>
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.
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 June 30, 1996, the Company was
in the process of drilling two gross (0.49 net) wells and was in the process of
completing three gross (1.22 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>
SIX MONTHS ENDED JUNE
30, 1996
----------------------
GROSS NET
----------- ---------
<S> <C> <C>
Exploratory:
Productive....................................... 3 1.74
Dry.............................................. 1 0.72
--- ---
Total.......................................... 4 2.46
--- ---
--- ---
Development:
Productive....................................... 4 1.98
Dry.............................................. -- --
--- ---
Total.......................................... 4 1.98
--- ---
--- ---
Total:
Productive....................................... 7 3.72
Dry.............................................. 1 0.72
--- ---
Total.......................................... 8 4.44
--- ---
--- ---
</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...................................................................................... 2,248 678.54
Gas wells...................................................................................... 1,278 231.11
--------- ---------
Total...................................................................................... 3,526 909.65
--------- ---------
--------- ---------
</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 June 30, 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
-------------------- -------------------- --------------------
REGION GROSS NET GROSS NET GROSS NET
- ------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin.............................. 126,091 50,151 65,741 59,669 191,832 109,820
Gulf Coast................................. 197,650 65,547 46,040 39,713 243,690 105,260
Rocky Mountain............................. 8,534 6,126 24,757 24,650 33,291 30,776
Other...................................... 43,651 26,108 44,166 41,134 87,817 67,242
--------- --------- --------- --------- --------- ---------
Total.................................. 375,926 147,932 180,704 165,166 556,630 313,098
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
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 ($1.2 million of which had
been expended through June 30, 1996) in return for a 50.0% interest in Redeco.
After the initial $2.0 million expenditure, the Company and the other members of
Redeco are each responsible for bearing 50.0% of future expenses. 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, Redeco's exclusive rights continue for 20 years. Redeco's
exclusive period to explore throughout the remainder of Moldova expires in 2005,
but Redeco 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 material 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 June 30, 1996,
Statewide expended approximately $3.3 million in acquiring interests in
approximately 1,400 properties. Through June 30, 1996, Statewide had received
revenues from such interests aggregating approximately $1.4 million, as well as
proceeds from sales of such interests of approximately $102,000.
GAS GATHERING AND TRANSMISSION. In 1996, the Company purchased a 40.5%
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
Delaware 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 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.
42
<PAGE>
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 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,
43
<PAGE>
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, the 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
personal injury and property damage allegedly caused by the hazardous substances
released into the environment. The Company is able to control directly the
operation of only those wells with respect to which its acts as operator.
Notwithstanding the Company's lack of
44
<PAGE>
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 $21 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). 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,
the Independent Producer's Association of America, the Texas Independent
Producers and Royalty Owners Association and the Permian Basin Landman
Association. 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 former 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
46
<PAGE>
companies, financial institutions and law firms on a variety of technical,
commercial and regulatory 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.
47
<PAGE>
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.
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 and that the Common Stock Offering is consummated without the
underwriters' over-allotment option being exercised.
<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) 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, assuming that the Common Stock Offering
is consummated without the underwriters' over-allotment option being exercised.
<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).......................... 5,554,992(3) 52.2%
</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 an option granted under the
Company's 1996 Stock Option Plan which option will be immediately
exercisable upon closing of the Offerings at a price equal to the initial
public offering price of the Common Stock.
(3) Includes 635,000 shares issuable pursuant to options granted 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. 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 employment other than for cause. If such
person were to voluntarily leave his employment with the
50
<PAGE>
Company prior to the second anniversary of the Agreement no further payments
would be required. If a voluntary termination were to occur after the second
anniversary of the Agreement, such person would be entitled to one year's salary
from the date of termination. 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, in either case if such event occurs within the initial three-year term of
the Agreement. 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 50,000 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 1,000 shares of Common Stock will be
granted to each person who qualifies as an outside director each year 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, shares of Common Stock or a broker-assisted
cashless transaction. 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, such participant may exercise an outstanding option under the
plan within six months 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 any
amendment which requires stockholder
51
<PAGE>
approval by law and may only modify an outstanding option, including the
repricing of such options, with the consent of the option holder. The Company
currently has five directors, two of whom are eligible to participate in the
plan.
1996 STOCK OPTION PLAN. The 1996 Stock Option Plan provides for the grant
of both incentive stock options and non-qualifying stock options, as well as
limited stock appreciation rights and supplemental bonuses, to the employees of
the Company and its subsidiaries, including officers and directors who are
salaried employees. A total of 850,000 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 Board of
Directors. The Board of Directors 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 (and for incentive stock options, 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, by surrendering
previously owned shares of Common Stock upon the exercise of the option or by a
promissory note or broker-assisted cashless exercise approved by the Board of
Directors, (c) the term of the option may not exceed ten years, and (d) no
option is transferrable other than by will, the laws of descent and distribution
or pursuant to a qualified domestic relations order. Upon termination of an
optionee's employment (other than by death or disability), an incentive stock
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, while the rights of the holder of a non-qualifying stock
option will be set forth in each option agreement. In the event of the
disability of an optionee, the option may be exercised by such person or his
personal representative at any time within one year of the termination of such
person's employment, but only to the extent the optionee had the right to
exercise the option as of the date of his disability. In the event of death of
the optionee, the option may be exercised by his personal representative or
successor in interest at any time until the later of the expiration of the
option or one year after the optionee's death, to the extent the option was
exercisable at the time of the optionee's death. Incentive stock 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. Limited stock appreciation rights may be granted under the plan
with respect to specified options, allowing the option holder to receive, in
cash, the difference between the exercise price and the market value in the
event of a change of control of the Company. The Board of Directors may also
grant supplemental bonuses under the plan which are cash bonuses not to exceed
the amount of income tax liability incurred by a plan participant upon the
exercise of a non-qualifying stock option or a limited stock appreciation right
with respect to which the bonus was granted. Incentive stock 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 an incentive stock 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 non-qualifying stock
options granted under the plan should be taxable when the option is exercised,
at which time the optionee would recognize ordinary income 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 will be treated as compensation
by the Company for federal income tax purposes. The Board of Directors may amend
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<PAGE>
the plan, without stockholder approval, in any respect other than any amendment
that requires stockholder approval by law, and may modify an outstanding option,
including the repricing of non-qualifying options, with the consent of the
option holder. There are currently approximately 100 persons who are eligible to
participate under the plan.
BONUS INCENTIVE PLAN. The Company has adopted the Bonus Incentive Plan to
become effective upon the completion of the Offerings. The plan provides that
the Board of Directors each year may award bonuses in cash, Common Stock, or
some combination thereof, to those officers, directors, employees and advisors
of the Company or a subsidiary of the Company, who the Board of Directors
determines have contributed to the success of the Company. A total of 100,000
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. All officers,
directors, employees and advisors of the Company or a subsidiary of the Company
who have completed a minimum of 180 days of service and are employed or retained
by the Company or such subsidiary on the last day of the plan year, other than
such persons who own ten percent or more of the outstanding shares of Common
Stock during that year are eligible to participate in the plan. Bonus awards
will be determined based on a number of factors, including performance and
salary level of the participant and the financial performance of the Company and
its subsidiaries. Bonuses will be awarded after review and upon approval of the
Board of Directors, subject to the terms and conditions of 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 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 1995 the Company paid $440,884 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
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<PAGE>
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.
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 tax advisors,
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
$0.8 million, 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. In addition, Messrs.
Liedtke, Grella and Musselman and NBCC will receive an aggregate of 6,000,000
shares of Common Stock in the Merger in exchange for their interests in the LLC.
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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 general unsecured senior obligations of the Company,
limited in aggregate principal amount to $100.0 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.
RANKING
The Notes will be general unsecured senior obligations of the Company and
will rank equally in right of payment with all existing and future Senior
Indebtedness of the Company, and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Notes, however, will be
effectively subordinated to secured Senior Indebtedness of the Company and its
subsidiaries with respect to the assets securing such Indebtedness, including
indebtedness under the Credit Facility, which is expected to be secured by a
lien on substantially all of the assets of the Company and any subsidiary of the
Company that guarantees the Company's obligations under the Credit Facility. See
"Description of Other Indebtedness -- Credit Facility." On a pro forma basis,
after giving effect to the Corporate Reorganization, the Offerings and the
application of proceeds therefrom, the Company would have had no senior
unsecured indebtedness, other than the Notes and trade payables, and $0.4
million of secured Senior Indebtedness. On such a pro forma basis, no
Indebtedness was junior to the Notes. The Notes will also be effectively
subordinated to liabilities of the Company's subsidiaries that
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are not Subsidiary Guarantors. On a pro forma basis, the total liabilities of
the Company's Subsidiaries were $6.5 million at June 30, 1996, all of which were
operating liabilities. The Indenture will limit, subject to certain financial
tests, the amount of additional Indebtedness that the Company and its
Subsidiaries can incur. See "Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock." The Indenture will also limit the amount of such
Indebtedness that can be secured. See "Certain Covenants -- Liens."
SUBSIDIARY GUARANTEES
The Indenture does not require any Subsidiary to guarantee the payment of
the Notes unless each such Subsidiary incurs Indebtedness (other than its
Indebtedness existing on the date of the Indenture and certain intercompany
Indebtedness). The Indenture requires the Company to cause such Subsidiary to
fully and unconditionally, jointly and severally guarantee (the "Subsidiary
Guarantees") the Company's payment obligations under the Notes prior to the
incurrence of such Indebtedness. See "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." On the date of the Indenture,
there will be no 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." As a result, claims of creditors against the Subsidiaries and the
Unrestricted Subsidiaries, including their trade creditors and tort claimants,
will effectively have priority to the property and earnings of such subsidiaries
over claims of creditors of the Company, including the Holders. 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 Person 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) becomes a Subsidiary Guarantor pursuant to a supplemental
indenture or other agreement in form and substance reasonably satisfactory to
the Trustee, 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."
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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.
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
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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.
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.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by Holders seeking
to accept the Change of Control Offer. If on a Change of Control Purchase Date
the Company does not have available funds sufficient to pay the Change of
Control Purchase Price or is prohibited from purchasing the Notes, an Event of
Default would occur under the Indenture. The definition of Change of Control
includes an event by which the Company sells, conveys, transfers or leases all
or substantially all of its properties to any Person. The phrase "all or
substantially all" is subject to applicable legal precedent and as a result in
the future there may be uncertainty as to whether a Change of Control has
occurred. The existence of a Holder's right to require, subject to certain
conditions, the Company to repurchase the Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction that
constitutes, or results in, a Change of Control.
The Credit Facility provides that certain change of control events with
respect to the Company would constitute a default thereunder and prohibits the
Company from making a Change of Control Offer or Asset Sale Offer. Any future
credit agreements or other agreements 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. Even if such consents to an offer to purchase were
obtained or the lenders did not declare a default under the Credit Facility and
other credit facilities, the Company's ability to pay cash to the holders of the
Notes upon a repurchase may be limited by the Company's then existing financial
resources.
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
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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.
The Credit Facility prohibits the Company from making an Asset Sale Offer.
The Indenture prohibits the Company from directly or indirectly engaging in an
Asset Sale of any Principal Properties to any Subsidiary other than a Subsidiary
Guarantor.
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, and will not permit any
Subsidiary of the Company to issue Capital Stock (except to the Company or to a
Wholly Owned Subsidiary) 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 "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
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<PAGE>
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 Subsidiary Guarantee, supplemental
indenture or other agreement 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.
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 the Company or 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 Subordinated
Indebtedness of the Company or any Subsidiary of the Company, 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
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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 day of the fiscal month during which the Indenture
was executed and delivered 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
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
Subordinated 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 Subordinated 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
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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 pursuant to this paragraph.
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 the
greater of (a) $50 million and (b) 15% of Adjusted Consolidated Net Tangible
Assets, in each case, 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
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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;
(vii) The incurrence by the Subsidiaries of Indebtedness in existence on
the date of the Indenture; and
(viii) 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:
provided that no Subsidiary may incur any Indebtedness other than Indebtedness
described in the foregoing clauses (iv) or (vii) unless such Subsidiary shall
have executed and delivered a Subsidiary Guarantee and such Subsidiary Guarantee
remains in full force and effect (unless terminated in accordance with the
provisions of the Indenture).
Further, the Company will not, directly or indirectly, in any event incur
any Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated to any other Indebtedness of the Company
unless such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) expressly subordinated to the Notes to the same
extent and in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company.
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) on any of their respective
assets, now owned or hereafter acquired, securing any Indebtedness unless the
Notes, in the case of such Indebtedness of the Company, and the Subsidiary
Guarantee of such Subsidiary Guarantor, in the case of such Indebtedness of a
Subsidiary Guarantor, are secured equally and ratably with such other
Indebtedness; PROVIDED that, if such Indebtedness is by its terms expressly
subordinate to the Notes or the Subsidiary Guarantees, the Lien securing such
subordinate or junior Indebtedness shall be subordinate and junior to the Lien
securing the Notes or the Subsidiary Guarantees with the same relative priority
as such subordinated or junior Indebtedness shall have with respect to the Notes
or the Subsidiary Guarantees, as the case may be.
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
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
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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."
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
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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, (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 and (c) such Net Proceeds
are applied in the same manner and to the same extent as Net Proceeds from an
Asset Sale pursuant to the "-- Asset Sales" covenant.
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 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
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Subsidiary Guarantor attempts to revoke its Subsidiary Guarantee or contest its
validity or any Subsidiary Guarantee shall not be in full force and effect
(other than in accordance with the terms of the Indenture).
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 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.
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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
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, the
Subsidiary Guarantees 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, the Subsidiary Guarantees 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).
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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, or the Subsidiary Guarantees 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, the
Subsidiary Guarantees 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.
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
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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. 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,
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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.
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
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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 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.
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"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 (other than any Principal
Properties to any Wholly Owned Subsidiary not a Subsidiary Guarantor) 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.
"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), (iv) in the case of a limited liability company, membership
interests, and (v) 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
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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
(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 or write-off 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
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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 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 or write-off 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.
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"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 (which shall initially be a credit
facility among the Company, NationsBank of Texas, N.A. or one of its affiliates,
as agent, and the other 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, extended,
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.
"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.
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"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.
"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.
"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
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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.
"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, except as provided in (b) below), 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, other than any loss arising out of the extinguishment of
Indebtedness refinanced with the proceeds of the Notes and other securities
issued contemporaneously with the Notes or Indebtedness that was refinanced in
June 1996 by such refinanced Indebtedness, (ii) any extraordinary or
nonrecurring gain (but not loss, except as provided in (i)
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above), 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.
"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.
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"PERMITTED LIENS" means (a) Liens existing on the date of the Indenture; (b)
Liens under the Credit Facility securing Indebtedness permitted to be incurred
in accordance with clause (i) of the second paragraph under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; (c) Liens now or
hereafter securing any Hedging Obligations so long as the related Indebtedness
is permitted under clauses (v) or (vi) of the second paragraph under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; (d) Liens
securing Permitted Refinancing Indebtedness; PROVIDED, that such Liens extend to
or cover only the property or assets currently securing the Indebtedness being
refinanced; (e) 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; (f)
statutory landlords', carriers', mechanics', workmen's, materialman's,
operator's or similar Liens arising in the ordinary course of business for sums
not delinquent or 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; (g) easements, rights of
way, restrictions and other similar encumbrances or minor imperfections in title
that, in the case of any of the foregoing, were not incurred or created to
secure the payment of borrowed money or the deferred purchase price of property
or services, and in the aggregate do not materially and adversely affect the
value of such properties or materially impair use for the purposes of which such
properties are held by the Company or any Subsidiaries; (h) Liens on, or related
to, properties to secure all or part of the costs (other than Indebtedness)
incurred in the ordinary course of business of exploration, drilling,
development or operation thereof; (i) 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; (j) Liens
on deposits made in the ordinary course of business; (k) Liens in favor of
collecting or payor banks having a right of set-off, 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; (l) Liens on pipeline or pipeline
facilities which arise out of operation of law; (m) 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; (n) liens reserved in oil and gas
leases for bonus or rental payments and for compliance with the terms of such
leases; (o) 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 and that do not secure Indebtedness; (p)
(i) Liens upon any property of any Person existing at the time of acquisition
thereof by the Company or a Subsidiary, (ii) Liens upon any property of a Person
existing at the time such Person is merged or consolidated with the Company or
any Subsidiary or existing at the time of the sale or transfer of any such
property of such Person to the Company or any Subsidiary, or (iii) Liens upon
any property of a Person existing at the time such Person becomes a Subsidiary;
PROVIDED, that in each case such Lien has not been created in contemplation of
such sale, merger, consolidation, transfer or acquisition, and PROVIDED that in
each such case no such Lien shall extend to or cover any property of the Company
or any Subsidiary other than the property being acquired and improvements
thereon; (q) purchase money Liens granted in connection with the acquisition of
assets, PROVIDED, that (i) such Liens attach only to the assets so acquired with
the purchase money indebtedness secured thereby, (ii) such Liens secure only
Indebtedness that is not in excess of 100% of the purchase price of such assets,
and (iii) such Liens attach no later than 180 days after the acquisition of such
assets; and (r) Liens securing Indebtedness incurred as a result of extensions,
renewals or replacements of Indebtedness secured by Liens permitted by clauses
(p) or (q), PROVIDED, that (i) the principal amount of the Indebtedness so
issued and secured by such Lien shall not exceed the principal amount of the
Indebtedness so extended, renewed, replaced, exchanged or refinanced and (ii)
the Indebtedness so
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issued and secured by such Lien shall not be secured by any property or assets
of the Company or any Subsidiary other than the property or assets subject to
the Liens securing such Indebtedness being exchanged or refinanced.
"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 any 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 any 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.
"PRINCIPAL PROPERTIES" means the oil and gas properties and other tangible
assets and properties owned by Company on the date of the Indenture
(collectively, the "Original Principal Properties") and assets and properties of
the Company obtained in exchange for any of the Original Principal Properties.
"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.
"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 or 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.
"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 or any of its
Subsidiaries 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.
"SENIOR REVOLVING INDEBTEDNESS" means revolving credit borrowings and
letters of credit under the Credit Facility and/or any successor facility or
facilities.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or any of
its Subsidiaries (whether outstanding on the date of the Indenture or thereafter
incurred) that is contractually subordinated or junior in right of payment of
principal, premium and interest to the Notes or the Subsidiary Guarantees.
"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
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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.
"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 13, 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 Credit Facility will provide the Company with a revolving facility based
on the borrowing base of its oil and gas assets which will initially be set at
$50.0 million, 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 assets of the Company and any subsidiary of the Company that guarantees the
Company's obligations under the Credit Facility. Initially, no subsidiaries of
the Company will guarantee the obligations of the Company under the Credit
Facility. See "Mangement's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a further
description of the Credit Facility.
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.
82
<PAGE>
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
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."
83
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement
(the "Underwriting Agreement") among the Company, 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 has 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.
The Underwriters have informed the Company that they do not expect to
confirm sales of Notes offered hereby to any accounts over which they exercise
discretionary authority.
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, an affiliate of Prudential
Securities Incorporated, 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 $16.3
million of the proceeds of the Offerings in redemption of a portion of the
membership interests owned by it and in a distribution to 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
84
<PAGE>
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 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. The members of the LLC made the
decision to change the LLC's principal accountants.
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
85
<PAGE>
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 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.
86
<PAGE>
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ADJUSTED EBITDA. Calculated by adding interest, income taxes, depreciation,
depletion and amortization, exploration and abandonment costs and extraordinary
loss resulting from extinguishment of debt to net income (loss).
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.
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
87
<PAGE>
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.
88
<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 June 30, 1996
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994,
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............. F-5
Consolidated Statements of Members' Capital for the years ended December 31, 1993,
1994, and 1995, and the six months ended June 30, 1995 (unaudited)................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............. F-7
Notes to Consolidated Financial Statements......................................... F-8
Financial Statements of the 1995 Acquisition:
Independent Auditors' Report....................................................... F-22
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993 and 1994 and the period ended June 12, 1995.............................. F-23
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-24
Financial Statements of the 1996 Acquisition:
Independent Auditors' Report....................................................... F-27
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993, 1994 and 1995, and the periods ended June 14, 1995 and 1996
(unaudited)....................................................................... F-28
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-29
</TABLE>
Note: The financial statements of Costilla Energy, Inc. (incorporated in June
1996) are not presented, as Costilla Energy, Inc. has no material assets,
liabilities or equity, and has not generated any material revenues or
incurred any material expenses.
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 June 14, 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,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 137 $ 2,866 $ 1,164
Accounts receivable:
Trade, net............................................................................ 1,042 3,154 2,521
Affiliates............................................................................ -- 507 927
Oil and gas sales..................................................................... 1,715 3,915 5,337
Prepaid and other current assets........................................................ 223 439 2,629
------- ------- -----------
Total current assets.............................................................. 3,117 10,881 12,578
------- ------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties..................................................................... 22,794 79,897 126,809
Unproved properties................................................................... 2,060 2,903 4,615
Accumulated depletion, depreciation and amortization.................................... (3,562) (9,413) (13,933)
------- ------- -----------
21,292 73,387 117,491
------- ------- -----------
Other property and equipment, net......................................................... 76 679 1,640
Deferred charges (Note 2)................................................................. 29 1,736 2,654
Note receivable -- affiliate.............................................................. 390 684 684
------- ------- -----------
$24,904 $87,367 $135,047
------- ------- -----------
------- ------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................................... $ 22 $ -- $ 98
Trade accounts payable.................................................................. 1,712 5,467 4,587
Undistributed revenue................................................................... 110 1,227 1,524
Other current liabilities............................................................... 192 1,691 2,103
------- ------- -----------
Total current liabilities......................................................... 2,036 8,385 8,312
------- ------- -----------
Long-term debt, less current maturities (Note 7).......................................... 23,591 71,494 122,267
Deferred income (Note 2).................................................................. 24 3,319 2,623
Other noncurrent liabilities.............................................................. -- 38 --
------- ------- -----------
Total liabilities................................................................. 25,651 83,236 133,202
------- ------- -----------
Redeemable members' capital (Note 10)..................................................... -- 12,278 13,557
------- ------- -----------
Members' capital (Note 10)................................................................ (747) (8,147) (11,712)
Commitments and contingencies (Note 8).................................................... -- -- --
------- ------- -----------
$24,904 $87,367 $135,047
------- ------- -----------
------- ------- -----------
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales........................................ $ 4,231 $ 7,637 $ 21,693 $ 5,568 $ 19,445
Interest and other....................................... 56 87 123 5 40
Gain on sale of assets................................... 110 112 -- -- 40
--------- --------- --------- --------- ---------
4,397 7,836 21,816 5,573 19,525
--------- --------- --------- --------- ---------
Expenses:
Oil and gas production................................... 1,688 2,349 10,024 2,268 8,093
Oil and gas production -- affiliates..................... -- 2 331 145 185
General and administrative............................... 639 634 2,910 678 2,439
General and administrative -- affiliates................. 313 550 661 330 370
Exploration and abandonments............................. 218 793 1,650 1,007 308
Depreciation, depletion and amortization................. 884 1,847 5,958 1,367 4,620
Interest................................................. 605 1,458 4,591 1,046 4,156
Other.................................................... -- -- 2 -- --
--------- --------- --------- --------- ---------
4,347 7,633 26,127 6,841 20,171
--------- --------- --------- --------- ---------
Income (loss) before federal income taxes and
extraordinary item.................................... $ 50 $ 203 $ (4,311) $ (1,268) (646)
Provision for federal income taxes
Current.................................................. (25) 8 3 -- --
Deferred................................................. 2 32 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item................ $ 73 $ 163 $ (4,314) $ (1,268) $ (646)
Extraordinary loss resulting from extinguishment of
debt (Note 7)......................................... -- -- -- -- (1,640)
--------- --------- --------- --------- ---------
Net income (loss)...................................... $ 73 $ 163 $ (4,314) $ (1,268) $ (2,286)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 and accretion of redeemable members' capital....................................... (2,278)
----------
Balance at December 31, 1995.......................................................................... (8,147)
Net loss (unaudited)................................................................................ (2,286)
Preferred return and accretion of redeemable members' capital (unaudited)........................... (1,279)
----------
Balance at June 30, 1996 (unaudited).................................................................. $ (11,712)
----------
----------
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 73 $ 163 $ (4,314) $ (1,268) $ (2,286)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization.................................... 884 1,847 5,958 1,367 4,620
Amortization of deferred charges............................................ -- -- 137 -- 169
Other noncash............................................................... (21) 35 (75) (28) 79
Gain on sale of oil and gas properties...................................... (110) (112) -- -- (40)
Extraordinary loss resulting from extinguishment of debt.................... -- -- -- -- 1,640
Change in operating assets and liabilities:
Increase in accounts receivable........................................... (837) (1,535) (4,818) (3,568) (1,209)
Decrease (increase) in other assets....................................... 20 301 (216) (107) (2,190)
Increase (decrease) in accounts payable................................... 262 723 4,863 2,188 (880)
Increase (decrease) in other liabilities.................................. 59 102 1,537 (1,624) 671
Increase (decrease) in deferred income.................................... (8) 3 3,294 -- (696)
------- -------- -------- -------- --------
Total adjustments....................................................... 249 1,364 10,680 (1,772) 2,164
------- -------- -------- -------- --------
Net cash provided by (used in) operating activities..................... 322 1,527 6,366 (3,040) (122)
------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures for oil and gas properties............................... (6,634) (11,819) (61,500) (57,261) (47,727)
Proceeds from sale of oil and gas properties.................................. 131 112 -- -- --
Additions to other property and equipment..................................... (228) (49) (720) (512) (1,996)
Advances on affiliate notes receivable........................................ -- (390) (247) -- --
------- -------- -------- -------- --------
Net cash used in investing activities................................... (6,731) (12,146) (62,467) (57,773) (49,723)
------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt............................................... 6,770 11,579 62,704 62,680 125,390
Payments of long-term debt.................................................... -- -- (11,232) (7,902) (74,519)
Deferred loan and financing costs............................................. -- -- (2,587) (2,587) (2,728)
Proceeds from redeemable members' capital..................................... -- -- 10,000 10,000 --
Contributions................................................................. 1 -- -- -- --
Withdrawals................................................................... (456) (961) (55) (97) --
------- -------- -------- -------- --------
Net cash provided by financing activities............................... 6,315 10,618 58,830 62,094 48,143
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents............................ (94) (1) 2,729 1,281 (1,702)
Cash and cash equivalents, beginning of period.................................. 232 138 137 137 2,866
------- -------- -------- -------- --------
Cash and cash equivalents, end of period........................................ $ 138 $ 137 $ 2,866 $ 1,418 $ 1,164
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
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. The Company
proportionately consolidates less-than-100%-owned oil and gas partnerships and
joint ventures in accordance with industry practice. 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. Prior to February 14, 1995, the combining companies
were owned by individuals who own 70% of the Company, in approximately the same
proportion relative to one another as is their current ownership. 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.
During the year ended December 31, 1995, the Company had sales to one customer
which accounted for 17.7% of total revenues.
TRADE RECEIVABLES
Trade receivables generally consist of amounts due from outside working
interest owners for their proportionate share of drilling and operating costs
incurred by the Company, as operator of the related properties.
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.
F-8
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 on a
straight-line basis over the estimated useful lives of the assets, which range
from 5 to 7 years.
Prior to the adoption of FAS 121 on January 1, 1995, the Company's aggregate
oil and gas properties were carried at cost, not in excess of total estimated
undiscounted future net revenues, on a worldwide basis.
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.
F-9
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil sold
to purchasers.
The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual production
of natural gas. Natural gas revenues would not have been significantly altered
in any period had the sales method of recognizing natural gas revenues been
utilized.
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 June 30, 1996, and for the six
months ended June 30, 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 transaction was accounted
for using the purchase method. The results of operations of the acquired
properties are included in the Consolidated Statements of Operations beginning
June 12, 1995. 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.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following table reflects the pro forma results of operations as though
the acquisition, net of the related properties sold, had occurred on January 1,
1994. The pro forma amounts are not necessarily indicative of the results that
may be reported in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................. 35,460 32,746
Net income (loss)........................................................ 1,563 (3,999)
</TABLE>
F-10
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(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.
(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. If market prices of oil and
gas exceed the strike price of put options, the options will expire unexercised,
therefore reducing the effective price received for oil and gas sales by the
cost of the related option. 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. If market rates of interest experienced during
the applicable swap term are below the rates of interest effectively fixed by
the swap agreement, the rate of interest experienced by the Company will exceed
the rate that would have been experienced under the Credit Agreement. At
December 31, 1995, the Company was a
F-11
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(5) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
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>
(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.
F-12
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<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.
F-13
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(7) LONG-TERM DEBT (CONTINUED)
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.
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 demonstrated its
intent and ability to refinance the current maturities under the Credit
Agreement by entering into a new loan agreement, proceeds of which were used to
repay the existing notes. Concurrently, the deferred charges associated with the
Credit Agreement were expensed as an extraordinary loss.
(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
F-14
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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 ($214,178 of which had been expended through December 31,
1995) in return for a 50.0% interest in Redeco. After the initial $2.0 million
expenditure, Redeco and the Company are responsible for bearing 50.0% each of
future expenses. 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, Redeco's exclusive rights
continue for 20 years. Redeco's exclusive period to explore throughout the
remainder of Moldova expires in 2005, but Redeco 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 material
fixed financial commitments with respect to the Concession.
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, NationsBanc 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 includes $10,000,000 that 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
F-15
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL (CONTINUED)
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>
In addition, a portion of NBCC's interest not subject to preferential return
is classified as redeemable members' capital as the Company may be required to
repurchase such interest upon the occurrence of certain events similar to those
events requiring redemption of the redeemable members' capital described above
and, in any event, on or after February 17, 2000. Such interest may, at the
Company's option, be repurchased to the extent the Company has exercised its
right to redeem all or a portion of the redeemable members' interest subject to
the preferential return. The redemption price the Company would pay in either
instance 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>
The ultimate redemption price of $5,500,000 is being accrued ratably over
the period from February 17, 1995 through February 17, 2000 and is treated as a
reduction of members' capital.
NBCC would retain an 18% interest in the Company after the redemptions
described above occur. Such interest is not subject to redemption.
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
F-16
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(11) RELATED PARTY TRANSACTIONS (CONTINUED)
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 $42.5 million. The
properties are located primarily in south and west Texas. The transaction was
accounted for using the purchase method. The results of operations of the
acquired properties are included in the Consolidated Statements of Operations as
of the closing date, June 14, 1996.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following table reflects the pro forma results of operations for the
six-months ended June 30, 1995 and 1996, as though both acquisitions, which
closed on June 12, 1995 and June 14, 1996, had occurred as of January 1, 1995.
The pro forma amounts are not necessarily indicative of the results that may be
reported in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................................................... $ 25,706 $ 28,748
Net loss............................................................... (3,779) (2,081)
</TABLE>
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 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.
F-17
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(12) SUBSEQUENT EVENTS (CONTINUED)
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. If such additional fees are
incurred, they will be amortized over the remaining period that the Loans are
expected to be outstanding.
(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
--------- --------- --------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
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-18
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (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 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-19
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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-20
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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-21
<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-22
<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-23
<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. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. 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-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)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994 JUNE 12, 1995
----------- ----------- -------------
(IN THOUSANDS)
<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-25
<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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
---------- ---------- -------------
(IN THOUSANDS)
<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-26
<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-27
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED PERIODS
DECEMBER 31, ENDED JUNE 14,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Oil and condensate...................................... $ 11,467 $ 10,170 $ 10,564 $ 5,140 $ 5,205
Natural gas............................................. 11,294 10,105 8,645 3,763 3,434
Gas plant............................................... 57 57 126 47 42
Transportation.......................................... 39 379 556 253 542
--------- --------- --------- --------- ---------
22,857 20,711 19,891 9,203 9,223
Direct operating expenses:
Lease operating......................................... 10,977 9,053 9,232 3,965 4,020
Workovers and dry hole costs............................ 675 869 1,002 256 450
Production taxes........................................ 1,166 1,089 992 458 453
Gas plant............................................... 131 350 598 393 269
Transportation.......................................... 10 394 587 268 222
--------- --------- --------- --------- ---------
12,959 11,755 12,411 5,340 5,414
--------- --------- --------- --------- ---------
Revenues in excess of direct operating expenses........... $ 9,898 $ 8,956 $ 7,480 $ 3,863 $ 3,809
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See the accompanying notes to these statements.
F-28
<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. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. Direct
operating expenses are recognized on the accrual method.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
The interim financial information for the periods ended June 14, 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
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)
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.
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.
F-30
<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 Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1996 Acquisition:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1993 1994 1995 1996
------------ ------------ ----------- -----------
(IN THOUSANDS)
<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>
The following are the sources of changes in the standardized measure of
discounted net cash flows:
<TABLE>
<CAPTION>
THREE MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Standardized measure, beginning of period....................... $ 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 period............................. $ 38,230 $ 29,566 $ 42,688 $ 50,436
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-31
<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.
No opinion is expressed by Williamson as to the fair market value of the
evaluated properties.
A-6
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 7
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.
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
The Company.................................... 16
Common Stock Offering.......................... 16
Use of Proceeds................................ 17
Capitalization................................. 18
Pro Forma Condensed Financial Statements....... 19
Selected Financial Information................. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business and Properties........................ 34
Management..................................... 46
Security Ownership of Certain Beneficial Owners
and Management................................ 49
Executive Compensation and Other Information... 50
Certain Transactions........................... 53
Description of Notes........................... 55
Description of Other Indebtedness.............. 82
Description of Capital Stock................... 82
Underwriting................................... 84
Legal Matters.................................. 85
Experts........................................ 85
Available Information.......................... 85
Glossary....................................... 87
Index to Financial Statements.................. F-1
Summary Reserve Report......................... A-1
</TABLE>
[LOGO]
COSTILLA ENERGY, INC.
$100,000,000 % SENIOR
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..................................... 109,375
Engineering fees and expenses.................................... 113,750
Trustee fees and expenses........................................ 7,500
Legal fees and expenses.......................................... 156,250
Printing and mailing expenses.................................... 122,000
Miscellaneous.................................................... 36,142
---------
TOTAL...................................................... 600,000
---------
---------
</TABLE>
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 director's 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 3 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
**10.1 Commitment Letter dated September 20, 1996 by NationsBank of Texas, N.A. to the Company
*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 Form of 1996 Stock Option Plan
*10.7 Form of 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
*10.14 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
*10.15 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
*10.16 Supplemental Agreement to Purchase and Joint Exploration Agreement dated August 7, 1996 among
the Company, Costilla Redeco Energy, L.L.C. and Resource Development Company Limited, L.L.C.
(DE)
*10.17 Form of Bonus Incentive Plan
*12.1 Computation of Ratio of Adjusted EBITDA to Interest Expense
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*12.2 Computation of Ratio of Earnings to Fixed Charges
*12.3 Pro Forma Computation of Ratio of ACNTA to Total Debt
*16.1 Letter Regarding Change of Accountants
*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>
- ------------------------
* Previously filed
** Filed herewith
(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, thereunto duly authorized in the City of Midland, State of Texas,
on September 24, 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.
SIGNATURE TITLE DATE
- ----------------------------------- -------------------- ------------------
Chairman of the
* Board, Chief
- ----------------------------------- Executive Officer September 24, 1996
Cadell S. Liedtke and Director
* President, Chief
- ----------------------------------- Operating Officer September 24, 1996
Michael J. Grella and Director
* Executive Vice
- ----------------------------------- President and September 24, 1996
Henry G. Musselman Director
/s/ BOBBY W. PAGE Senior Vice Present,
- ----------------------------------- Treasurer and Chief September 24, 1996
Bobby W. Page Financial Officer
*
- ----------------------------------- Director September 24, 1996
Jerry J. Langdon
*
- ----------------------------------- Director September 24, 1996
W.D. Kennedy
*By: /s/ BOBBY W. PAGE
- -----------------------------------
Bobby W. Page
ATTORNEY-IN-FACT
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
**10.1 Commitment Letter dated September 20, 1996 by NationsBank of Texas, N.A. to the Company
*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 Form of 1996 Stock Option Plan
*10.7 Form of 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
*10.14 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
*10.15 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
*10.16 Supplemental Agreement to Purchase and Joint Exploration Agreement dated August 7, 1996 among
the Company, Costilla Redeco Energy, L.L.C. and Resource Development Company Limited, L.L.C.
(DE)
*10.17 Form of Bonus Incentive Plan
*12.1 Computation of Ratio of Adjusted 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
*16.1 Letter Regarding Change of Accountants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*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>
- ------------------------
* Previously filed
** Filed herewith
<PAGE>
COSTILLA ENERGY, INC.,
as Issuer,
Subsidiary Guarantors parties hereto
$100,000,000
___% SENIOR 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).......................................................4.16; 4.18
(b)................................................................N.A.
(c)(1)............................................................11.03
(c)(2)............................................................11.03
(c)(3).............................................................N.A.
(d)................................................................N.A.
(e)...............................................................11.04
(f)................................................................4.18
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.
-i-
<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.........21
SECTION 1.03. RULES OF CONSTRUCTION.....................................21
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE....................22
SECTION 1.05. ACTS OF HOLDERS...........................................22
SECTION 1.06. SATISFACTION AND DISCHARGE................................23
ARTICLE II
THE NOTES....................................................................24
SECTION 2.01. FORM AND DATING...........................................24
SECTION 2.02. EXECUTION AND AUTHENTICATION..............................25
SECTION 2.03. REGISTRAR AND PAYING AGENT................................26
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.......................27
SECTION 2.05. GLOBAL NOTES..............................................27
SECTION 2.06. TRANSFER AND EXCHANGE.....................................28
SECTION 2.07. REPLACEMENT NOTES.........................................29
SECTION 2.08. OUTSTANDING NOTES.........................................30
SECTION 2.09. TEMPORARY NOTES...........................................30
SECTION 2.10. CANCELLATION..............................................31
SECTION 2.11. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED............31
SECTION 2.12. AUTHORIZED DENOMINATIONS..................................32
SECTION 2.13. COMPUTATION OF INTEREST...................................32
SECTION 2.14. PERSONS DEEMED OWNERS.....................................32
SECTION 2.15. CUSIP NUMBERS.............................................32
ARTICLE III
REDEMPTION...................................................................32
SECTION 3.01. NOTICE TO TRUSTEE.........................................32
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.........................33
SECTION 3.03. NOTICE OF REDEMPTION......................................33
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION............................34
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE...............................34
SECTION 3.06. NOTES REDEEMED IN PART....................................35
-ii-
<PAGE>
ARTICLE IV
COVENANTS....................................................................35
SECTION 4.01. PAYMENT OF NOTES..........................................35
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY...........................35
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST...........36
SECTION 4.04. CORPORATE EXISTENCE.......................................36
SECTION 4.05. MAINTENANCE OF PROPERTY...................................36
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS.........................37
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A
CHANGE OF CONTROL.........................................37
SECTION 4.08. LIMITATION ON ASSET SALES.................................39
SECTION 4.09. OWNERSHIP OF CAPITAL STOCK................................42
SECTION 4.10. UNRESTRICTED SUBSIDIARIES.................................42
SECTION 4.11. RESTRICTED PAYMENTS.......................................43
SECTION 4.12. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK.....................................................45
SECTION 4.13. LIENS.....................................................47
SECTION 4.14. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES....................................47
SECTION 4.15. TRANSACTIONS WITH AFFILIATES..............................48
SECTION 4.16. REPORTS...................................................48
SECTION 4.17. WAIVER OF STAY, EXTENSION OR USURY LAWS...................49
SECTION 4.18. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT...................................................49
SECTION 4.19. INVESTMENT COMPANY ACT....................................50
SECTION 4.20. SALE AND LEASEBACK........................................50
SECTION 4.21. FURTHER INSTRUMENTS AND ACTS..............................50
ARTICLE V
CONSOLIDATION, MERGER,
CONVEYANCE, LEASE OR TRANSFER................................................50
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS...................50
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED.........................51
ARTICLE VI
DEFAULTS AND REMEDIES........................................................51
SECTION 6.01. EVENTS OF DEFAULT.........................................51
SECTION 6.02. ACCELERATION..............................................53
SECTION 6.03. OTHER REMEDIES............................................54
SECTION 6.04. WAIVER OF PAST DEFAULTS...................................54
SECTION 6.05. CONTROL BY MAJORITY.......................................54
SECTION 6.06. LIMITATION ON SUITS.......................................55
-iii-
<PAGE>
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT......................55
SECTION 6.08. TRUSTEE MAY FILE PROOFS OF CLAIM..........................56
SECTION 6.09. PRIORITIES................................................56
SECTION 6.10. UNDERTAKING FOR COSTS.....................................57
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS..........................57
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT
POSSESSION OF THE NOTES...................................57
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES........................57
SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE............................58
SECTION 6.15. DELAY OR OMISSION NOT WAIVER..............................58
ARTICLE VII
TRUSTEE......................................................................58
SECTION 7.01. DUTIES OF TRUSTEE.........................................58
SECTION 7.02. RIGHTS OF TRUSTEE.........................................59
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE..............................60
SECTION 7.04. TRUSTEE'S DISCLAIMER......................................60
SECTION 7.05. NOTICE OF DEFAULTS........................................60
SECTION 7.06. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO
HOLDERS...................................................60
SECTION 7.07. COMPENSATION AND INDEMNITY................................61
SECTION 7.08. REPLACEMENT OF TRUSTEE....................................62
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER...............................64
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.............................65
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.........65
ARTICLE VIII
DEFEASANCE...................................................................66
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE
OR COVENANT DEFEASANCE....................................66
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE............................66
SECTION 8.03. COVENANT DEFEASANCE.......................................67
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE...........67
SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS
TO BE HELD IN TRUST; MISCELLANEOUS PROVISIONS.............69
SECTION 8.06. REINSTATEMENT.............................................69
ARTICLE IX
AMENDMENTS...................................................................70
SECTION 9.01. WITHOUT CONSENT OF HOLDERS................................70
SECTION 9.02. WITH CONSENT OF HOLDERS...................................71
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES.........................72
-iv-
<PAGE>
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT.......................72
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS.............72
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES..........................72
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES................73
ARTICLE X
SUBSIDIARY GUARANTEES........................................................74
SECTION 10.01. ADDITION OF SUBSIDIARY GUARANTORS.........................74
SECTION 10.02. RELEASE OF A SUBSIDIARY GUARANTOR.........................74
SECTION 10.03. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON
CERTAIN TERMS.............................................75
ARTICLE XI
MISCELLANEOUS................................................................76
SECTION 11.01. TRUST INDENTURE ACT CONTROLS..............................76
SECTION 11.02. NOTICES...................................................76
SECTION 11.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT........76
SECTION 11.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.............77
SECTION 11.05. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR..............77
SECTION 11.06. PAYMENTS ON BUSINESS DAYS.................................77
SECTION 11.07. GOVERNING LAW.............................................77
SECTION 11.08. NO RECOURSE AGAINST OTHERS................................77
SECTION 11.09. SUCCESSORS................................................77
SECTION 11.10. COUNTERPARTS..............................................77
SECTION 11.11. TABLE OF CONTENTS; HEADINGS...............................78
SECTION 11.12. SEVERABILITY..............................................78
SECTION 11.13. FURTHER INSTRUMENTS AND ACTS..............................78
EXHIBIT A FORM OF GLOBAL NOTE
EXHIBIT B FORM OF CERTIFICATED NOTE
EXHIBIT C FORM OF SUBSIDIARY GUARANTEE
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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, 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 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.
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 to make this Indenture a valid
instrument of the Company 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.
"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.
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"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 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,
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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 4.15
hereof.
"AGENT MEMBER" has the meaning set forth in Section 2.05(a) hereof.
"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
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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 (other than any Principal Properties to
any Wholly Owned Subsidiary not a Subsidiary Guarantor) 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(d)
hereof.
"ASSET SALE PAYMENT DATE" has the meaning set forth in Section
4.08(e)(ii) hereof.
"ASSET SALE PURCHASE PRICE" has the meaning set forth in Section
4.08(d) 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.
"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.
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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
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), (iv) in the case of a limited liability company,
membership interests, and (v) 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) 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
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"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 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); 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 or write-off 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
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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 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 or write-off 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 (which shall initially be a
credit facility among the Company, NationsBank of Texas, N.A. or one of its
affiliates, as agent, and the other 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, extended, 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.
"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.
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"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(c) 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 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 3 of the
Subsidiary Guarantees.
"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.
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"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.
"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 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
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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 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
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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.
"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 except as provided in (b) below), 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, other than such losses arising out of the extinguishment of
Indebtedness refinanced from the proceeds of the Notes and other securities
issued contemporaneously with the Notes or Indebtedness that was refinanced in
June 1996 by such refinanced Indebtedness, (ii) any extraordinary or
nonrecurring gain (but not loss except as provided in (i) above), 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.
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"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 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 4.18 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
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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.
"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(b)(ii);
(d) Investments outstanding as of the date of this Indenture; (e) Investments in
Wholly Owned Subsidiaries that are 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.
"PERMITTED LIENS" means (a) Liens existing on the date of the
Indenture; (b) Liens under the Credit Facility securing Indebtedness permitted
to be incurred in accordance with Section 4.12(b)(i); (c) Liens now or hereafter
securing any Hedging Obligations so long as the related Indebtedness is
permitted under Section 4.12(v) or (vi); (d) Liens securing Permitted
Refinancing Indebtedness; PROVIDED, that such Liens extend to or cover only the
property or assets currently securing the Indebtedness being refinanced;
(e) 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; (f) statutory landlords',
carriers', mechanics', workmen's, materialman's, operator's or similar Liens
arising in the ordinary course of business for sums not delinquent or 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; (g) easements, rights of way, restrictions and
other similar encumbrances or minor imperfections in title that, in the case of
any of the foregoing, were not incurred or created to secure the payment of
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borrowed money or the deferred purchase price of property or services, and in
the aggregate do not materially and adversely affect the value of such
properties or materially impair use for the purposes of which such properties
are held by the Company or any Subsidiaries; (h) Liens on, or related to,
properties to secure all or part of the costs (other than Indebtedness) incurred
in the ordinary course of business of exploration, drilling, development or
operation thereof; (i) 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; (j) Liens on
deposits made in the ordinary course of business; (k) Liens in favor of
collecting or payor banks having a right of set-off, 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; (l) Liens on pipeline or pipeline
facilities which arise out of operation of law; (m) 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; (n) liens reserved in oil and gas
leases for bonus or rental payments and for compliance with the terms of such
leases; (o) 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 and that do not secure Indebtedness,
(p) (i) Liens upon any property of any Person existing at the time of
acquisition thereof by the Company or a Subsidiary, (ii) Liens upon any property
of a Person existing at the time such Person is merged or consolidated with the
Company or any Subsidiary or existing at the time of the sale or transfer of any
such property of such Person to the Company or any Subsidiary, or (iii) Liens
upon any property of a Person existing at the time such Person becomes a
Subsidiary; PROVIDED, that in each case such Lien has not been created in
contemplation of such sale, merger, consolidation, transfer or acquisition, and
PROVIDED that in each such case no such Lien shall extend to or cover any
property of the Company or any Subsidiary other than the property being acquired
and improvements thereon; (q) purchase money Liens granted in connection with
the acquisition of assets, PROVIDED, that (i) such Liens attach only to the
assets so acquired with the purchase money indebtedness secured thereby,
(ii) such Liens secure only Indebtedness that is not in excess of 100% of the
purchase price of such assets, and (iii) such Liens attach no later than 180
days after the acquisition of such assets; and (r) Liens securing Indebtedness
incurred as a result of extensions, renewals or replacements of Indebtedness
secured by Liens permitted by clauses (p) or (q) provided that (i) the principal
amount of the Indebtedness so issued and secured by such Lien shall not exceed
the principal amount of the Indebtedness so extended, renewed, replaced,
exchanged or refinanced and (ii) the Indebtedness so issued and secured by such
Lien shall not be secured by any property or assets of the Company or any
Subsidiary other than the property or assets subject to the Liens securing such
Indebtedness being exchanged or refinanced.
"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
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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.
"PERSON" means any individual, corporation, partnership, joint
venture, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"PRINCIPAL PROPERTIES" means the oil and gas properties and other
tangible assets and properties owned by Company on the date of this Indenture
(collectively, the "Original Principal Properties") and assets and properties of
the Company obtained in exchange for any of the Original Principal Properties.
"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.
"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.
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"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.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"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.
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"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.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or
any of its Subsidiaries (whether outstanding on the date of the Indenture or
thereafter incurred) that is contractually subordinate or junior in right of
payment of principal, premium and interest to the Notes or the Subsidiary
Guarantees.
"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 this Indenture.
"SUBSIDIARY GUARANTEE" means the guarantee of the Notes by a
Subsidiary Guarantor pursuant to Exhibit C and Article X under which such
Subsidiary Guarantor guarantees the Notes.
"SUBSIDIARY GUARANTOR" means each of the Subsidiaries that agrees to
guarantee the Notes.
"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 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.
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"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.
"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
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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 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.
"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;
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(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 of the Company 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 of the Company stating that the information with
respect to such factual matters is in the possession of the Company or such
Subsidiary, 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.
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 Subsidiaries of the Company. 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 Subsidiaries of the Company, if made in the manner provided
in this Section.
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(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 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, the Notes and the Subsidiary Guarantees 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
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on any Notes or any Subsidiary Guarantee 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. 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
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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. 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.
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 preceding
paragraphs of this Section 2.02, 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.
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Upon the occurrence of any event specified in Section 2.06(a) hereof
and compliance by the Company with the provisions of the paragraphs preceding
this 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 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
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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 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
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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.
(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.
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(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.
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.
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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 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
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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 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
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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 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
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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)(c) the name and address of the Paying Agent;
(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;
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(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.
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
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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 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.
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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 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.
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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;
(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
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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 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 (i)
accept for payment all Notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (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 Change of Control 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 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 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
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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.
SECTION 4.08. LIMITATION ON ASSET SALES. (a) The Company shall not
directly or indirectly engage in an Asset Sale of any Principal Properties to
any Subsidiary other than a Subsidiary Guarantor.
(b) 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.
(c) The Company may apply Net Proceeds of an Asset Sale, at its
option, (i) to permanently reduce Senior Indebtedness other than Senior
Revolving Indebtedness, (ii) to permanently reduce Senior Revolving Indebtedness
(and to correspondingly reduce commitments with respect thereto), or (iii) 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.
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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."
(d) 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(e) 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.
(e) 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 all 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 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,
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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.
(f) 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(e) 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.
(g) 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(f) 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 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.
(h) 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
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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.
(i) 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.
(j) 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 4.09. 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 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) 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.
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
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the Company or such Subsidiary with an unrelated Person and as otherwise
permitted under Section 4.11. 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 Subsidiary Guarantee,
supplemental indenture or other agreement 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 Subsidiary
Guarantee, supplemental indenture or other agreement 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.
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 the Company or 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 Subordinated
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
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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 day of the fiscal month which this Indenture was
executed and delivered 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 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
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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 Subordinated 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 Subordinated 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 of the
Company set forth in an Officers' Certificate of the Company 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, subject to Section 4.12(c), 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 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
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may be incurred pursuant to this paragraph, unless the guaranteed Indebtedness
is incurred by the Company pursuant to this paragraph.
(b) The foregoing provisions, subject to Section 4.12(c), 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 the greater of (x) $50 million and (y) 15% of Adjusted Consolidated
Net Tangible Assets, in each case, 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 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;
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(vii) the incurrence by the Subsidiaries of Indebtedness in
existence on the date of this Indenture listed on Schedule 4.12(b)(viii)
attached to this Indenture; and
(viii) 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;
PROVIDED that no Subsidiary may incur any Indebtedness other than Indebtedness
described in Section 4.12(b)(iv) or (vii) unless such Subsidiary shall have
executed and delivered a Subsidiary Guarantee and such Subsidiary Guarantee
shall be in full force and effect (except to the extent Section 10.02 hereof
would result in the release thereof) so long as such Indebtedness remains
outstanding.
(c) The Company will not, directly or indirectly, in any event
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated to any other Indebtedness of the
Company unless such Indebtedness is also by its terms (or by the terms of any
agreement governing such Indebtedness) made expressly subordinate to the Notes
to the same extent and in the same manner as such Indebtedness is subordinated
pursuant to subordination provisions that are most favorable to the holders of
any other Indebtedness of the Company.
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 on any of their respective assets,
now owned or hereafter acquired, securing any Indebtedness of the Company or any
of its Subsidiaries, unless the Notes in the case of such Indebtedness of the
Company, the Subsidiary Guarantee of such Subsidiary Guarantor, in the case of
such Indebtedness of a Subsidiary Guarantor, are secured equally and ratably
with such other Indebtedness; PROVIDED that, if such Indebtedness is by its
terms expressly subordinate to the Notes or the Subsidiary Guarantees, the Lien
securing such subordinate or junior Indebtedness shall be subordinate and junior
to the Lien securing the Notes or the Subsidiary Guarantees with the same
relative priority as such subordinated or junior Indebtedness shall have with
respect to the Notes or the Subsidiary Guarantees, as the case may be.
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,
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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.
SECTION 4.15. 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 $1.0 million, a resolution of the Board of
Directors of the Company 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 of the Company 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 4.16. 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.
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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).
SECTION 4.17. 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 4.18. 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 4.18(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 4.16 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.
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SECTION 4.19. 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.
SECTION 4.20. 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, (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,
and (c) such Net Proceeds are applied in accordance with Section 4.08.
SECTION 4.21. 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 5.01. 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
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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.
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 5.02. 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 6.01. 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; 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; or
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(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
(d) the Company or any Subsidiary fails to comply with any of its
other agreements or covenants in, or provisions of, the Notes, this
Indenture or any Subsidiary Guarantee 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
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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 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 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 (other
than pursuant to Section 10.02 hereof), 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 6.02. 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.
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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 waived. No such recession shall affect any subsequent Default or
impair any right consequent thereon.
SECTION 6.03. 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, the Subsidiary Guarantors 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, the Subsidiary Guarantors 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 6.04. 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 6.05. 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
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conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; PROVIDED that:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture of the Subsidiary Guarantees 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 6.06. 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 of the Subsidiary Guarantees, except in the manner herein provided and
for the equal and ratable benefit of all Holders of Notes.
SECTION 6.07. 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
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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.
SECTION 6.08. 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 or other obligor 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 6.09. 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
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(c) THIRD: To the Company.
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 or the Subsidiary Guarantees; 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 or in the Subsidiary
Guarantees 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 or the Subsidiary Guarantees 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
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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.
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 7.01. 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
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it takes or omits to take in good faith in accordance with a direction received
by it pursuant to Section 6.05 hereof.
(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 7.02. 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 11.02 hereof from the Company or any Holder of Notes.
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(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, 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 7.03. 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 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, the Subsidiary Guarantees 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 or the Subsidiary Guarantors
in this Indenture or the Subsidiary Guarantees, 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 7.05. 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 7.06. 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
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(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 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 7.07. 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.
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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.
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.
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(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 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
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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.
(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
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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
(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.
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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 of the Company
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 and each Subsidiary Guarantor from its obligations with respect to its
Subsidiary Guarantee as provided in this Section 8.02 on and after the date the
conditions set forth 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, the
Subsidiary Guarantees 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 the Subsidiary Guarantees.
(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.
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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 4.16, 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 4.16,
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 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
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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.
(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.
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(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 8.05. 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.
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 8.06. 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, the Subsidiary Guarantee and such Notes
from which the Company and the Subsidiary Guarantors have 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.
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ARTICLE IX
AMENDMENTS
SECTION 9.01. 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 or execute and deliver any Subsidiary Guarantee
or amendment or supplement thereto, 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 or its Subsidiaries, for
the benefit of the Holders of all of the Notes, or to surrender any right
or power herein conferred upon the Company or its Subsidiaries; 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 the Subsidiary Guarantees; or
(g) to cure any ambiguity herein, or to correct or supplement any
provision hereof or the Subsidiary Guarantees 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 10.02; or
(j) to add or release a Subsidiary Guarantor in compliance with the
provisions of Article XI.
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SECTION 9.02. 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 or amendments or supplements to the Subsidiary Guarantees
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or the Subsidiary Guarantees
or of modifying in any manner the rights of the Holders (including Section 4.07
and Section 4.08 hereof); PROVIDED that no such supplement or amendment 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;
(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 or the Subsidiary
Guarantees relating to the relative ranking of the Notes or the Subsidiary
Guarantees in a manner adverse to the Holders thereof.
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It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplement or amendment, 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 or other amendment under this Article IX, this
Indenture or the Subsidiary Guarantees, as the case may be, shall be modified in
accordance therewith, and such supplemental indenture or other amendment shall
form a part of this Indenture or the Subsidiary Guarantees, as the case may be,
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, the Subsidiary Guarantees 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 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
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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 or other amendment 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 or other amendment. In executing any supplemental indenture or other
amendment, 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 or other amendment 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 or any Subsidiary Guarantor, as the case may be, has
all necessary corporate power and authority to execute and deliver the
supplemental indenture or other amendment and that the execution, delivery
and performance of such supplemental indenture or other amendment has been
duly authorized by all necessary corporate action of the Company or such
Subsidiary Guarantor;
(c) the execution, delivery and performance of the supplemental
indenture or other amendment 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 such Subsidiary Guarantor, or (iii) any material agreement or
instrument to which the Company or such Subsidiary Guarantor 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 or other amendment 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 such Subsidiary Guarantor, or
(ii) any material order, writ, injunction or decree of any court or
governmental instrumentality applicable to the Company or such Subsidiary
Guarantor;
(e) such supplemental indenture or other agreement has been duly and
validly executed and delivered by the Company or such Subsidiary Guarantor,
and this Indenture or Subsidiary Guarantee, as the case may be, together
with such supplemental indenture or other agreement constitutes a legal,
valid and binding obligation of the Company or such Subsidiary Guarantor
enforceable against such Person in accordance with its terms, except as
such enforceability may
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be limited by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and general equitable principles; and
(f) this Indenture or Subsidiary Guarantee, as the case may be,
together with such amendment or supplement complies with the Trust
Indenture Act.
ARTICLE X
SUBSIDIARY GUARANTEES
SECTION 10.01. ADDITION OF SUBSIDIARY GUARANTORS.
(a) The Company agrees to cause each Subsidiary to execute and
deliver a Subsidiary Guarantee in the form of Exhibit C attached hereto pursuant
to which such Subsidiary guarantees the payment of the Notes at or before such
Subsidiary incurs any Indebtedness other than Indebtedness described in Section
4.12(b)(iv) or (vii).
(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 Subsidiary Guarantee in the form of Exhibit C attached hereto
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 be acceptable to the Trustee in its discretion and provided
that no opinion need be rendered concerning the enforceability of the Subsidiary
Guarantee).
SECTION 10.02. 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 10.03 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.
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(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 X.
(d) Any Subsidiary Guarantor not released in accordance with this
Section 10.02 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
X and the Subsidiary Guarantees.
SECTION 10.03. 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 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 10.02 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, 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, Subsidiary
Guarantee or other instrument 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 Section
10.02 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, Subsidiary Guarantee or other instrument and
shall not have to assume such Subsidiary Guarantor's Subsidiary Guarantee). In
the case of any such consolidation, merger, sale,
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<PAGE>
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.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. 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 11.02. 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 11.03. 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 (b) an Opinion of Counsel stating
that, in the opinion of such counsel, all such conditions precedent have been
complied with.
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SECTION 11.04. 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 4.18 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 11.05. 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 11.06. 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 11.07. 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 11.08. 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, the Subsidiary Guarantees 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 11.09. 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.
SECTION 11.10. 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
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shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
SECTION 11.11. 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 11.12. 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 11.13. 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 COMPANY,
as Trustee
By
--------------------------------------
Name:
Title:
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<PAGE>
STATE OF TEXAS )
) SS.:
COUNTY OF HARRIS )
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 Texas
My commission expires
-------------
[Seal]
STATE OF TEXAS )
) SS.:
COUNTY OF HARRIS )
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 Texas
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. AND THE TRUSTEE
NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
<PAGE>
GLOBAL NOTE
REPRESENTING ____% SENIOR 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
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<PAGE>
FORM OF REVERSE SIDE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
GLOBAL NOTE
REPRESENTING ___% SENIOR 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 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 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, subsidiaries of the Company that have guaranteed the payment of the
Notes (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, pay dividends or make certain other restricted payments,
apply net proceeds from certain asset sales, enter into certain transactions
with affiliates, incur indebtedness, 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
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<PAGE>
most 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
A-6
<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
A-7
<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 4.16 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, the Subsidiary Guarantees 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 and the Subsidiary Guarantees, without the consent of any Holder of
Notes, the Company, the Subsidiary Guarantors and the Trustee may amend the
Indenture, the Subsidiary Guarantees 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 contained in its Subsidiary Guarantee; (ii) to add
additional covenants or to
A-8
<PAGE>
surrender rights and powers conferred on the Company or any Subsidiary; (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 or the Subsidiary Guarantees; (vii) to cure any
ambiguity in the Indenture or the Subsidiary Guarantees, to correct or
supplement any provision in the Indenture or the Subsidiary Guarantees 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. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture and the
Subsidiary Guarantees, the payment of principal of, premium, if any, and
interest on the Notes will be guaranteed by each Subsidiary Guarantor.
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.
A-9
<PAGE>
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, the
Subsidiary Guarantees 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
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 Notation
Decrease in Increase in Maturity Made by
Date of Principal Principal Following such or on
Decrease/ Amount at Amount at Decrease/ Behalf of
Increase Maturity Maturity Increase Trustee
- -------- -------- -------- -------- -------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
- ---------- ---------- ---------- ---------- ----------
A-11
<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.
A-12
<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.
A-13
<PAGE>
EXHIBIT B
FORM OF FACE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
No. CUSIP No.
--------- -----------
___% SENIOR 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
B-2
<PAGE>
FORM OF REVERSE SIDE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
____% SENIOR 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 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
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 subsidiaries of
the Company that have guaranteed the payment of the Notes (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, pay dividends or make certain other restricted payments,
apply net proceeds from certain asset sales, enter into certain transactions
with affiliates, incur indebtedness, 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
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<PAGE>
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.
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.
B-5
<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 4.16 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, the Subsidiary Guarantees 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 and the Subsidiary Guarantees, without the consent of any Holder of
Notes, the Company, the Subsidiary Guarantors and the Trustee may amend the
Indenture, the Subsidiary Guarantees or the Notes (i) to evidence the succession
of another Person to (A) the Company and the assumption by
B-7
<PAGE>
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; (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 or the Subsidiary Guarantees; (vii) to cure any ambiguity in
the Indenture or the Subsidiary Guarantees, to correct or supplement any
provision in the Indenture or the Subsidiary Guarantees 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. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture and the
Subsidiary Guarantees, 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.
16. 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
B-8
<PAGE>
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.
17. 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, the
Subsidiary Guarantees 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.
18. 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
B-9
<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.
B-10
<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.
B-11
<PAGE>
EXHIBIT C
SUBSIDIARY GUARANTEE
This Subsidiary Guarantee, dated as of ___________________, (this
"Subsidiary Guarantee" and together with all such guarantees delivered from time
to time under Article X of the Indenture referred to below being referred to
herein as the "Subsidiary Guarantees") is made by ____ and ______________ (each
a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors") in favor
of STATE STREET BANK AND TRUST COMPANY as Trustee (together with its successors
and assigns in such capacity, the "Trustee") under the Indenture (as amended or
modified from time to time, the "Indenture") dated as of _____, 1996 made by
Costilla Energy, Inc., a Delaware corporation (the "Company"), pursuant to which
the Company issued its __% Senior Notes due 2006 (the "Notes"). Unless otherwise
defined herein, capitalized terms used herein have the meanings assigned to such
terms in the Indenture.
WHEREAS, pursuant to Section 4.12(b) of the Indenture, each Subsidiary
Guarantor is prohibited from incurring certain Indebtedness without executing
and delivering a Subsidiary Guarantee; and
WHEREAS, the Subsidiary Guarantor wishes to incur such Indebtedness;
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Subsidiary Guarantor agrees as follows:
SECTION 1. UNCONDITIONAL GUARANTEE.
Each Subsidiary Guarantor hereby, jointly and severally,
unconditionally 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 the Indenture and the Notes by the
Company, whether at maturity, by acceleration, redemption, repurchase or
otherwise, including, without limitation, interest on the 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 2.
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 Guarantor hereby agrees that its
obligations hereunder shall be unconditional irrespective of the validity,
regularity or enforceability of the Notes, the Indenture or any other Subsidiary
Guarantee, 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 or any other Subsidiary Guarantor,
any action to enforce the same or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of any
C-1
<PAGE>
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 or any other Subsidiary Guarantor, 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 VI of the Indenture 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 VI of the Indenture 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 2. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY.
Each Subsidiary Guarantor and, by its acceptance of its Note, 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
Guarantees shall be limited to the maximum amount as will, after giving effect
to all other contingent and fixed liabilities of such Subsidiary Guarantors 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 Guarantees or pursuant to Section 3,
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 2 is for the benefit of the
creditors of each Subsidiary Guarantor.
SECTION 3. 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 Guarantees,
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
C-2
<PAGE>
the Funding Guarantor in discharging the Company's obligations with respect to
the Notes or, subject to this Section 3, any other Subsidiary Guarantor's
obligations with respect to the Subsidiary Guarantees.
SECTION 4. AMENDMENTS. The provisions of this Subsidiary Guarantee
shall not be amended or modified except in accordance with Article IX of the
Indenture.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Each Subsidiary Guarantor
hereby represents and warrants as follows:
(a) Such Subsidiary Guarantor is (i) a duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, (ii) has all requisite power and authority to own or lease and
operate its properties and to carry on its business as now conducted and as
proposed to be conducted; and (iii) is duly qualified or licensed to do business
as a foreign [corporation] and is in good standing in all jurisdictions in which
it owns or leases assets and property or in which the conduct of its business
requires it to so qualify or be licensed except where the failure to so qualify
or be licensed would not have a material adverse effect on the operations,
business, prospects, assets, properties or condition (financial or other) of the
Company and its Subsidiaries, including such Guarantor, considered as one
enterprise.
(b) The execution, delivery and performance by such Subsidiary
Guarantor of this Subsidiary Guarantee, have been duly authorized by all
necessary corporate or other action on the part of such Subsidiary Guarantor and
do not and will not violate any provision of the articles or certificate of
incorporation or by-laws or other charter documents of such Subsidiary Guarantor
and do not and will not violate, or be in conflict with, or constitute a default
under, or permit the termination of, or result in the creation of any Lien
(other than a Permitted Lien) upon any property of such Subsidiary Guarantor
under (x) any statute or law or any judgment, decree, order, regulation or rule
of any court or governmental authority to which such Subsidiary Guarantor or any
of its properties may be subject, or (y) any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument to which such Subsidiary
Guarantor is a party or by which it may be bound, or to which any of its
properties may be subject, which conflict, default, termination or Lien would
have a material adverse effect upon the operations, business, prospects, assets,
properties or condition (financial or other) of the Company and its
Subsidiaries, including such Subsidiary Guarantor, considered as one enterprise.
This Subsidiary Guarantee is the legal, valid and binding obligation of such
Subsidiary Guarantor, enforceable against such Subsidiary Guarantor in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
enforcement of creditors rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(c) No authorization, consent, approval or other action by, and no
notice to or filing with, any court, governmental, administrative or judicial
authority or regulatory body
C-3
<PAGE>
(domestic or foreign) is required for the due execution, delivery or performance
by such Subsidiary Guarantor of this Subsidiary Guarantee.
SECTION 6. ADDRESSES FOR NOTICES. All notices, requests, demands and
other communications provided for or permitted hereunder shall be in writing
(including telegraphic communication) and, if to any Subsidiary Guarantor,
mailed or telegraphed or delivered to it, addressed to it at the address of the
Company specified in the Indenture, if to Trustee, addressed to it at the
address specified in the Indenture, or as to each party at such other address as
shall be designated by such party in a written notice to each other party
complying as to delivery with the terms of this Section 17.
SECTION 7. NO WAIVER; REMEDIES. No failure on the part of the
Trustee or any Holder, to exercise, and no delay in exercising, an right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right. The remedies herein provided are cumulative
and not exclusive of any remedies provided by law or any other agreement.
SECTION 8. CONTINUING GUARANTY; TRANSFER OF NOTES; TERMINATION OF
GUARANTY.
(a) This Subsidiary Guarantee is a continuing guaranty and, subject
to the provisions of subsection (b) below, shall (i) remain in full force and
effect until payment in full of the Notes and all other amounts payable under
this Subsidiary Guarantee, (ii) be binding upon each Subsidiary Guarantor, its
successors and assigns, and (iii) inure to the benefit of and be enforceable by
the Trustee and its successors, transferees and assigns.
(b) All obligations of a particular Subsidiary Guarantor hereunder
shall automatically terminate as set forth in Section 10.02 of the Indenture
enforceable in such jurisdiction and such illegal, invalid or unenforceable
provision shall be legal, valid and enforceable in all other jurisdictions.
SECTION 9. INDENTURE OBLIGATIONS. Each Subsidiary Guarantor agrees
to perform the obligations of a Subsidiary Guarantor under the Indenture.
SECTION 10. GOVERNING LAW. THIS SUBSIDIARY GUARANTEE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK,
UNITED STATES.
SECTION 10. 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.
C-4
<PAGE>
IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this
Subsidiary Guarantee to be duly executed and delivered by its officer thereunto
duly authorized as of the date first above written.
[LIST OF SUBSIDIARY GUARANTORS]
By:
--------------------------------
Name and Title:
<PAGE>
EXHIBIT 5.1
COTTON, BLEDSOE, TIGHE & DAWSON
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
SUITE 300
500 WEST ILLINOIS
MIDLAND, TEXAS 79701-4337
P.O. BOX 2776 ZIP 79702-2776
TELEPHONE (915) 684-5782
FAX (915) 682-3672
September 24, 1996
Costilla Energy, Inc.
400 West Illinois, Suite 1000
Midland, Texas 79701
Re: Registration Statement on Form S-1
(Registration No. 333-08909)
Gentlemen:
We have acted as counsel for Costilla Energy, Inc., a Delaware corporation
(the "Company") in connection with the registration under the Securities Act
of 1933, as amended (the "Act"), of $100,000,000 of ____% Senior Notes due
2006 (the "Notes") of the Company to be sold to the several Underwriters to
be named in Schedule 1 (collectively, the "Underwriters") attached to the
Underwriting Agreement (the "Underwriting Agreement") to be entered into by
and between the Underwriters, for whom NationsBanc Capital Markets, Inc. and
Prudential Securities Incorporated are acting as representatives, the
Company, and Costilla Energy, L.L.C. A Registration Statement on Form S-1
(Registration No. 333-08909) covering the sale of the Notes was filed under
the Act with the Securities and Exchange Commission (the "Commission") on
July 26, 1996, as amended by Amendment No. 1 filed with the Commission
on August 30, 1996 and Amendment No. 2 to be filed with the Commission
on September 24, 1996, and as further amended (the "Registration Statement").
In reaching the conclusions expressed in this opinion, we have examined
signed copies of the Registration Statement and all exhibits thereto. We
have also examined and relied upon originals, or copies certified to our
satisfaction, of (i) the Certificate of Incorporation
<PAGE>
Costilla Energy, Inc.
September 24, 1996
Page 2
and Bylaws of the Company, (ii) minutes and records of the corporate
proceedings of the Company with respect to the issuance of the Notes and
related matters, (iii) the form of Underwriting Agreement, and (iv) such other
agreements and instruments relating to the Company as we have deemed necessary
or appropriate for the purposes of the opinions hereinafter expressed. In
rendering such opinions, we have relied, to the extent we deemed reasonable,
on certificates and certain other information provided to us by officers of the
Company and public officials as to matters of fact of which the maker of such
certificates or the person providing such information had knowledge, without
investigation into or verification of such information. Furthermore, in
rendering such opinions we have assumed that the signatures on all documents
examined by us are genuine, that all documents and corporate record books
submitted to us as originals are authentic, accurate and complete, and that all
documents submitted to use as copies are true, correct and complete copies of
the originals thereof. We have also assumed that the Underwriting Agreement
will be executed in substantially the same form as presented to us.
Based solely upon the foregoing, subject to the assumptions, limitations
and qualifications set forth herein, and specifically limited in all respects
to the laws of the State of Texas, of the United States of America and the
General Corporation Law of the State of Delaware, we are of the opinion that
the Notes registered pursuant to the Registration Statement have been duly
and validly authorized by the Company and, when paid for, issued or sold and
delivered in accordance with the terms of the Underwriting Agreement and the
Registration Statement, will be binding obligations of the Company, subject
to applicable bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or similar laws affecting creditors' rights severally and to
general principles of equity and the availability of equitable remedies.
Please note in this regard that we are not licensed to practice law in the
State of Delaware, but have reviewed Delaware law in connection with the
opinions expressed herein.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration
Statement. In giving this consent we do not thereby admit that we come
within the category of persons whose consent is required under the Act or the
rules and regulations of the Commission promulgated thereunder.
This opinion is rendered only to the Company and solely for the benefit of
the Company, its stockholders and the Commission in connection with the
registration and the issuance of the Notes pursuant to the Registration
Statement. This opinion may not be otherwise used,
<PAGE>
Costilla Energy, Inc.
September 24, 1996
Page 3
circulated, quoted, relied upon, or referred to by you or the Commission for
any other purpose or by any other person, firm or corporation for any
purpose, without our prior written consent.
Yours very truly,
COTTON, BLEDSOE, TIGHE & DAWSON
By: /s/ Richard T. McMillan
------------------------------
Richard T. McMillan
<PAGE>
September 20, 1996
Costilla Energy, Inc.
400 West Illinois Avenue, 10th Floor
Midland, Texas 79701
Attn: Michael J. Grella
Dear Mike:
We are pleased to advise you that NationsBank of Texas, N.A. ("NATIONSBANK")
hereby commits (the "COMMITMENT"), subject to the terms and conditions outlined
in this letter and in the Summary of Terms and Conditions attached hereto,
incorporated herein and made a part hereof (collectively, this "COMMITMENT
LETTER") that it will make available to you a credit facility in an amount up to
$50,000,000 (the "CREDIT FACILITY"). Proceeds of the Credit Facility will be
used as provided in the Summary of Terms and Conditions.
The Commitment is conditioned upon the preparation, execution and delivery of
such documents in form and substance satisfactory to us and our counsel (the
"DEFINITIVE DOCUMENTS"), upon the resolution to our satisfaction of any legal or
structural issues in connection with the Credit Facility, and upon the absence
of a material adverse change in Costilla's financial condition, operations,
prospects or properties from that reflected in the information delivered to
NationsBank or any of its affiliates in connection with the transaction
contemplated by this Commitment Letter. The Commitment is also subject to (i)
the completion of such legal and financial review as we determine to be
necessary, (ii) the absence of any factors which we determine from such review
to adversely affect our ability to offer the Credit Facility as set forth in the
attached Summary of Terms and Conditions, and (iii) the satisfaction of all
conditions set forth in this Commitment Letter.
Neither this Commitment Letter nor the Commitment is assignable by you. Nothing
in this Commitment Letter, express or implied, shall give any person, other than
the parties hereto, any benefit or any legal or equitable right, remedy or claim
under this Commitment Letter. Furthermore, this Commitment Letter is
confidential and may not be disclosed to any person or entity except Costilla's
officers, directors, employees and professional advisors.
<PAGE>
Mr. Michael J. Grella
September 20, 1996
Page 2
Costilla agrees to pay NationsBank the fees and expenses as set forth in the
attached Summary of Terms and Conditions. In addition, Costilla agrees to
indemnify and hold NationsBank and its affiliates harmless from and against any
and all liabilities, claims, losses, damages, penalties, costs, or expenses
(including without limitation, reasonable fees and expenses of counsel) of any
kind or nature whatsoever which in any way or to any extent may be imposed on,
incurred by, or asserted against us in connection with this Commitment Letter,
the Definitive Documents, or any of the negotiations, transactions and events at
any time associated therewith or contemplated therein except for any of the
foregoing arising from the gross negligence or willful misconduct of NationsBank
or its affiliates, and upon demand from time to time, to reimburse NationsBank
and its affiliates for all reasonable out-of-pocket costs, expenses and other
payments, including but not limited to, reasonable legal fees and disbursements
incurred or made in connection with the Commitment and the preparation,
execution and delivery of the Definitive Documents, regardless of whether or not
the Definitive Documents are executed.
Additionally, Costilla agrees to allow NationsBank or any of its affiliates to
reference this Commitment for the benefit of promoting NationsBank or such
affiliate.
This Commitment Letter (including the attached Summary of Terms and Conditions)
sets forth the entire understanding of the parties as to the scope of the
Commitment and the obligation of NationsBank with respect thereto. The
Commitment will expire at 5:00 PM Midland, Texas time on September 23, 1996
unless accepted prior to such time. The Commitment will also expire on October
15, 1996 if by such date you have not executed and delivered Definitive
Documents acceptable to us as contemplated in the attached Summary of Terms and
Conditions.
This Commitment Letter shall be governed by, and construed in accordance with,
the laws of the State of Texas as applied to contracts made and performed within
such state, without giving effect to the principles of conflicts of laws
thereof. To the fullest extent permitted by applicable law, each of NationsBank
and Costilla hereby irrevocably submit to the jurisdiction of any Texas court or
Federal court sitting in Texas, in respect of any suit, action or proceeding
arising out of or relating to the Commitment, this Commitment Letter or the
Definitive Documents and agree that any such suit, action or proceeding may be
heard and determined in any such court. Each of NationsBank and Costilla waive,
to the fullest extent permitted by applicable law, any objection which it may
now or hereafter have to the laying of the venue of any such suit, action or
proceedings brought in any such court, and any claim that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
forum.
<PAGE>
Mr. Michael J. Grella
September 20, 1996
Page 3
This Commitment Letter (including the summary of Terms and Conditions) replaces
in its entirety the original Commitment Letter dated as of August 27, 1996
between you and NationsBank, which original Commitment Letter shall hereafter be
null and void. The $50,000 payment made under the original Commitment Letter
will be applied to the $50,000 payment required under this Commitment Letter.
Please indicate your acceptance of the Commitment and your agreement to the
matters contained in this Commitment Letter by executing this document and
returning it to us at or before 5:00 PM September 23, 1996, together with
one-fifth of the underwriting fee ($50,000) due upon your execution of this
Commitment Letter with the remainder payable at closing.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By: /s/ Frank K. Stowers
---------------------------
Name: Frank K. Stowers
Title: Vice President
ACCEPTED AND AGREED TO
as of the date first written above
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
---------------------------
Name: Michael J. Grella
Title: President
<PAGE>
SUMMARY OF TERMS AND CONDITIONS
SEPTEMBER 20, 1996
BORROWER: Costilla Energy, Inc., a Delaware corporation.
AGENT: NationsBank of Texas, N.A. ("NATIONSBANK").
ARRANGER: NationsBanc Capital Markets, Inc. ("NCMI").
LENDERS: NationsBank and other financial institutions
acceptable to Agent, NCMI and Borrower.
ISSUING LENDER: NationsBank.
AMOUNT AND TYPE Revolving Line of Credit consisting of Working
CREDIT FACILITY: Capital Advances and Acquisition Advances (as
described below) in an amount not to exceed the
Borrowing Base, subject to the sublimits set
forth below. Prior to the second anniversary
date of the Credit Facility, the Borrowing Base
will be redetermined periodically and increased
or decreased in the manner described below, but
in no event will the Borrowing Base ever exceed
$50,000,000.
Beginning on the second anniversary of the date
of the Credit Facility, the Borrowing Base will
be redetermined periodically and MAY BE DECREASED,
BUT WILL NOT BE INCREASED above the amount of
the Borrowing Base in effect immediately prior
to such redetermination. In addition, the
Borrowing Base WILL BE FURTHER REDUCED EACH
QUARTER by an amount equal to one-twelfth of
the Borrowing Base in effect on such second
anniversary date.
WORKING CAPITAL Limited to maximum of $20,000,000 and used for:
ADVANCES: (i) general corporate purposes and (ii) issuance
of letters of credit (sub-limit on letter of
credit issuance of $1,000,000).
- -----------------------------------------------------------------------------
Costilla Energy, Inc. Page 1 NationsBank
<PAGE>
ACQUISITION ADVANCES: Limited to maximum of $30,000,000 and used for
the acquisition of oil and gas reserves that
meet all of the following criteria:
(a) at least ninety percent (90%) of the
value attributable to such reserves (calculated
by Borrower using pricing guidelines established
by Agent from time to time in its sole
discretion) is characterized as proved
developed producing reserves under standards
recognized by the oil and gas industry.
(b) no more than sixty percent (60%) of the
value attributable to such reserves is funded
with Acquisition Advances.
(c) all such reserves are located in the
United States of America or in off-shore areas
under the jurisdiction of any State or the
continental United States of America.
(d) the interest to be acquired by Borrower
in such reserves is a direct working interest
or royalty interest.
(e) Borrower has delivered to Agent title
opinions covering a substantial part of the
reserves (as designated by Agent) in accordance
with guidelines established by Agent from time
to time in its sole discretion.
(f) Borrower has performed environmental due
diligence on the associated properties in
accordance with standards established by Agent
from time to time in its sole discretion.
(g) Upon the purchase of such reserves by
Borrower, they shall become subject to a
first-priority perfected Lien in favor of Agent
for the benefit of Lenders.
- -----------------------------------------------------------------------------
Costilla Energy, Inc. Page 2 NationsBank
<PAGE>
INTEREST RATE: Agent's fluctuating "Base Rate" (defined as the
higher of Agent's Prime Rate and the Federal
Funds Rate plus 1/2%) plus the Applicable Base
Rate Margin, based on a 360-day year, payable
monthly.
Agent's reserve adjusted eurodollar rate for
periods of 1, 2, 3, or 6 months, plus the
Applicable Eurodollar Rate Margin, based on a
360 day year, payable quarterly and at the end
of each interest period.
Interest on past due principal and interest
shall be payable at the highest lawful rate.
The Applicable Margins shall be based upon the
outstanding balances of the Credit Facility,
including Letter of Credit Obligations, divided
by the Borrowing Base then in effect (expressed
in basis points):
<TABLE>
<CAPTION>
Less-than Greater-than Less-than Greater-than
50% 50% 75% 75%
<S> <C> <C> <C>
Base Rate Margin 0 25 50
Eurodollar Rate
Margin 137.5 162.5 200
</TABLE>
FEES: A commitment fee payable quarterly in arrears
on the unutilized portion of the Borrowing
Base, and calculated based on a 360-day year
(expressed in basis points).
<TABLE>
<CAPTION>
Less-than Greater-than Less-than Greater-than
50% 50% 75% 75%
<S> <C> <C> <C>
Commitment Fee 30 35 40
</TABLE>
Underwriting fee of 50 bp; 20% due upon
acceptance of the commitment and 80% due at
closing of the Credit Facility.
A fee of 1/4% on any increase in the Borrowing
Base.
Letter of Credit Fees: (i) issuance fee for the
account of the Issuing Lender in the amount of
0.125% of the face amount of each letter of
credit issued, and (ii) letter of
- -----------------------------------------------------------------------------
Costilla Energy, Inc. Page 3 NationsBank
<PAGE>
credit fee for the pro rata accounts of the
Lenders equal to the greater of (a) the
Applicable Eurodollar Rate Margin per annum of
the face amount of each letter of credit and
(b) $500, payable at the time of issuance.
Agent's fee of $50,000 per year.
AMORTIZATION/MATURITY: Beginning on the second anniversary of the date
of the Credit Facility, quarterly payments of
principal in the amount necessary to cause the
outstanding balance of the Credit Facility to
equal the reduced Borrowing Base. Due in full
on the fifth anniversary of the Credit Facility.
OPTIONAL PREPAYMENTS: Permitted at any time without penalty, so long
as no principal bearing interest at a
eurodollar rate is paid before the end of the
applicable interest period.
BORROWING BASE REDUCTIONS: Prior to the second anniversary date of the
Credit Facility, Borrower may reduce the
Borrowing Base within fifteen days after the
date on which the Borrowing Base is
redetermined.
REQUIRED PREPAYMENTS: See requirements under Borrowing Base.
SECURITY AND SUPPORTING First priority liens and assignments of
AGREEMENTS: production covering substantially all of
Borrower's oil and gas properties and all
related contracts.
First priority security interest in and pledge
of Borrower's stock in all of its subsidiaries.
Negative Pledge on all other properties of
Borrower and its subsidiaries, and Agreement to
Pledge such properties or stock upon request.
All security documentation will be prepared by
Agent's counsel and must be satisfactory to
Agent and Lenders in form and substance.
TITLE ASSURANCES: Legal opinions or other title assurances
satisfactory to Agent covering certain oil and
gas properties to be mortgaged and assurances
from Borrower that title matters have not
materially changed since the title
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<PAGE>
review which occurred in connection with the
NationsBridge facility.
ENVIRONMENTAL REVIEW: An environmental report on the oil and gas
properties owned by Borrower, in form and
substance and authorship satisfactory to Agent
and assurances from Borrower that environmental
matters have not materially changed since the
environmental due diligence which occurred in
connection with the NationsBridge facility.
BORROWING BASE: The aggregate outstanding principal balance
under the Credit Facility (including any
letters of credit) may at no time exceed the
Borrowing Base, which will be set semi-annually
by Agent and Lenders in their sole discretion
(Agent and Borrower shall each have the right
to request additional Borrowing Base
redeterminations but not more than once during
any six month period). All Borrowing Base
redeterminations will be set by Majority
Lenders provided that agreement of 100% of the
Lenders will be required to increase the
Borrowing Base. INCREASES IN THE BORROWING
BASE WILL NOT OCCUR AFTER THE SECOND
ANNIVERSARY DATE.
To assist Agent and Lenders in setting the
Borrowing Base, Borrower will furnish by
February 28 of each year an annual engineering
report on proved oil and gas properties of
Borrower and its subsidiaries, dated as of
January 1 of such year, and prepared by
Williamson Petroleum Consultants, Inc. or other
independent petroleum engineers acceptable to
Agent, and Borrower will furnish by July 31 of
each year a supplemental in-house engineering
report effective as of July 1.
Borrower will furnish to Agent and Lenders with
these engineering reports a report of
production and associated operating statements
for the oil and gas properties of Borrower.
Borrower will also furnish to Agent and Lenders
a quarterly report of production and associated
operating statements for the oil and gas
properties of Borrower.
If the Borrowing Base ever falls below the
outstanding balance of the Credit Facility (the
amount by which the
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<PAGE>
outstanding balance exceeds the Borrowing Base
is herein called the "BORROWING BASE
DEFICIENCY"), Borrower must either (i) prepay
the Credit Facility in the amount of the
deficit within 10 days after notice thereof by
Agent, or elect within such period to repay the
Borrowing Base Deficiency in 6 equal
consecutive monthly installments which shall be
in addition to other principal payments due
under the Credit Facility or (ii) mortgage to
Agent additional oil and gas properties
sufficient to cause an increase in the
Borrowing Base by the amount of such Borrowing
Base Deficiency; however, if a Borrowing Base
Deficiency exists as the result of a quarterly
reduction occurring after the second
anniversary date, Borrower must immediately
prepay the Credit Facility in an amount at
least equal to the Borrowing Base Deficiency.
If Borrower does not (x) elect to cure a
Borrowing Base Deficiency within 10 days after
notice thereof or (y) immediately eliminate a
Borrowing Base Deficiency occurring as a result
of a quarterly reduction, Agent may require any
of Borrower's subsidiaries to unconditionally
guarantee the Credit Facility and grant to
Agent first perfected liens and security
interests in all of its properties to secure
the Credit Facility.
CONDITIONS OF LENDING: 1. Borrower shall have successfully completed
(i) the merger of Costilla Energy, L.L.C. into
Costilla Energy, Inc. (the "MERGER"), (ii) the
public issuance of ten-year unsecured debt in
the net amount of at least $100,000,000 and
(iii) equity in the gross amount of at least
$60,000,000 upon terms and conditions outlined
in the Form S-1 Registration Statements filed
with Securities and Exchange Commission on
August 30, 1996.
2. All documents governing the Credit Facility
(including without limitation a Credit
Agreement, Promissory Note, and documents
establishing the security rights listed above)
must be executed and delivered in forms
acceptable to Agent and Lenders.
3. The Credit Facility and the loan documents
must comply with all applicable laws,
contracts, instruments and governmental
policies.
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Costilla Energy, Inc. Page 6 NationsBank
<PAGE> 4. There must be no default at closing or any
funding, and all representations and warranties
must then be true.
5. Receipt by Agent of:
(a) Closing certificates of senior officers of
Borrower, confirming that all representations
and warranties are true, that all closing
conditions have been satisfied, and such other
matters as Agent may specify.
(b) Certificates of public officials as to
Borrower's existence and good standing.
(c) Such legal opinions of counsel for
Borrower and Costilla Petroleum Corporation (as
to certain transfers of assets only) and
satisfaction or resolution of such other legal
requirements or risks, as Agent and its counsel
may specify including but not limited to
opinions regarding the Merger and the
associated transfer of assets in connection
therewith.
(d) Title assurances as described above.
(e) Environmental review as described above.
6. There must be no material adverse change in
the financial condition, operations, prospects
or properties of Borrower or its subsidiaries
from that presented to Agent in connection
herewith, and no pending or threatened
challenge thereto by governmental officials or
third parties.
REPRESENTATIONS AND The Credit Agreement and other loan documents
WARRANTIES: shall contain such representations and warranties
that Agent deems appropriate for this
transaction, including without limitation
confirmation of various factors which Agent and
Lenders have considered in making their
decision to enter into the Credit Facility.
AFFIRMATIVE COVENANTS: The Credit Agreement and other loan documents
shall contain such affirmative covenants of
Borrower and its subsidiaries as are usual and
customary for transactions
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<PAGE>
of this kind, including without limitation the
following affirmative covenants:
1. Borrower will deliver the following
financial statements and reports:
(a) Annual audited consolidated (and
consolidating upon the request of Agent)
financial statements of Borrower and its
subsidiaries (with accountants' certificate of
no default and officer's certificate of no
default) within 105 days after each fiscal year.
(b) Quarterly unaudited consolidated (and
consolidating upon the request of Agent)
financial statements of Borrower and its
subsidiaries (with officer's certificate of no
default) within 60 days after each fiscal
quarter.
(c) Reports outlined under "BORROWING BASE"
above.
2. Agent and Lenders will have general access
to information about Borrower and its
subsidiaries.
3. Borrower will pay Agent's and Arranger's
expenses, including legal fees, in negotiating,
syndicating, administering, enforcing, and
defending the various loan documents and rights
of Agent and Lenders thereunder, together with
interest on amounts not timely paid to the
extent permitted by law. Borrower will pay
Lenders' expenses, including legal fees, in
enforcing and defending the various loan
documents and Lenders' rights thereunder,
together with interest on amounts not timely
paid to the extent permitted by law.
4. Borrower and its subsidiaries will maintain
insurance as is customary in industry and
satisfactory to Agent.
5. All transactions among Borrower, its
subsidiaries and their affiliates shall be on
terms no more favorable
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Costilla Energy, Inc. Page 8 NationsBank
<PAGE>
than could be obtained from third parties in an
arm's length transaction.
6. Each of Borrower's subsidiaries that
guarantees any Debt of Borrower will also
unconditionally guarantee the Credit Facility
and grant to Agent first perfected liens and
security interests in all of its properties to
secure the Credit Facility.
NEGATIVE COVENANTS: The Credit Agreement and other loan documents
shall contain such negative covenants of
Borrower and Subsidiaries as are usual and
customary for transactions of this type,
including without limitation the following
negative covenants:
1. Debt (other than trade debt, taxes and other
current liabilities according to GAAP, but
including guaranties) of Borrower and its
subsidiaries will be limited to the Credit
Facility, public unsecured debt contemplated
hereby, and other debt of Borrower not to
exceed $750,000. Any intercompany debt will be
limited to customary intercompany accounts in
an amount to be determined.
2. Liens by Borrower and its subsidiaries will
be limited to those securing the Credit
Facility, and to customary statutory and
inchoate liens.
3. Mergers by Borrower and its subsidiaries
will be prohibited unless Borrower is the
surviving entity and no Default or Event of
Default exists or occurs as a result of such
merger.
4. Sales of interests in Borrower's
subsidiaries will be prohibited. Sales of
property by Borrower and its subsidiaries will
be generally prohibited, EXCEPT THAT assets
having an aggregate value of $750,000 may be
sold during the six-month period following each
redetermination of the Borrowing Base without
consent of Lenders. Borrower shall notify
Agent of each such sale and Agent shall release
such property at Borrower's expense. All other
sales of property must be approved by Agent and
Majority Lenders and the Borrowing Base
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<PAGE>
will be reduced by the value assigned by
Lenders to such property.
5. Dividends and other payments to equity
owners by Borrower will not be permitted.
Prepayments, purchases and defeasance of
Borrower's public unsecured debt will not be
permitted.
6. Investments (or acquisitions) by Borrower
and its subsidiaries will be limited to (i)
high-grade cash equivalents, (ii) investments
in the Moldovan operation in amount not to
exceed $2,500,000 per year, (iii) oil and gas
reserves to which proved reserves are
attributable, (iv) Republic Gas Partners,
L.L.C., in an amount not to exceed $1,000,000,
(v) existing Promissory Notes from A & P Meter
Service and Supply, Inc., and (vi) oil and gas
leases to which no proved reserves are
attributable in an amount not to exceed
$2,500,000 per year. Investments by Borrower
in its subsidiaries (and loans by Borrower to
its subsidiaries) will generally be prohibited
unless the subsidiary has unconditionally
guaranteed the Credit Facility and granted to
Agent first perfected liens and security
interests in all of its properties to secure
the Credit Facility. Should a Borrowing Base
Deficiency or an Event of Default occur, the
Agent shall have the right to require that each
subsidiary of Borrower unconditionally guaranty
the Credit Facility and grant to Agent first
perfected liens and security interests in all
of its assets to secure the Credit Facility.
In the ordinary course of business, cash
transfers to and from Borrower's subsidiaries
for customary intercompany accounts will be
allowed in an amount to be determined. Loans
and new lines of business will be generally
prohibited.
7. Borrower's consolidated current ratio will
not be less than 1.0 to 1.0. Current
maturities of long term debt will be excluded
as current liabilities and up to $10,000,000 of
borrowing availability can be included as a
current asset.
8. After the transactions contemplated hereby,
Borrower's consolidated tangible net worth will
not be less than the sum of (i) $30,000,000
plus (ii) 50% of Borrower's consolidated net
income earned after June
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Costilla Energy, Inc. Page 10 NationsBank
<PAGE>
30, 1996, plus (iii) 75% of net proceeds
from the sale of equity interests in Borrower
after the making of the first advance under the
Credit Facility.
9. Payments due under leases (other than oil and
gas leases) by Borrower and its subsidiaries shall
not exceed $1,000,000 in any fiscal year.
10. Commodity hedging shall be limited in any
month, without duplication, to: (i) 100% of proved
production for puts and (ii) 75% of proved
production for all other derivative products.
11. Beginning December 31, 1996, Borrower's
ratio of EBITDA to interest expense shall never
be less than 2.0 to 1. The calculation of
EBITDA and interest expense will be based upon:
(i) for the period ending December 31, 1996 the
immediately preceding two fiscal quarters
annualized, (ii) for the period ending March
31, 1997 the immediately preceding three fiscal
quarters annualized, and (iii) for the period
ending June 30, 1997 and for each fiscal
quarter thereafter, the last four fiscal
quarters.
12. Neither Borrower nor any of its
subsidiaries will, directly or indirectly,
enter into, create, or otherwise allow to exist
any contract or other consensual restriction on
the ability of any subsidiary of Borrower: (i)
to pay dividends or make other distributions to
Borrower, (ii) to redeem equity interests held
in it by Borrower, (iii) to repay loans and
other indebtedness owing by it to Borrower, or
(iv) to transfer any of its assets to Borrower.
EVENTS OF DEFAULT: The Credit Agreement and other loan
documents will contain such events
of default as are usual and customary for
transactions of this kind, including without
limitation defaults in payment or performance
under the Credit Facility, misrepresentations,
cross-defaults to other debt instruments or
material obligations, events of default related
to ERISA and insolvency, change of ownership,
change in management and any material
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<PAGE>
adverse change affecting Borrower or any of its
subsidiaries.
Upon the occurrence of an event of default,
Agent may require any of Borrower's
subsidiaries to unconditionally guarantee the
Credit Facility and grant to Agent first
perfected liens and security interests in all
of its properties to secure the Credit Facility.
INDEMNIFICATION: Borrower will generally indemnify Agent, NCMI,
their affiliates and all Lenders under the
Credit Facility against losses in connection
with the Credit Facility and the rights
provided to Agent and Lenders in connection
therewith, including without limitation
indemnification against costs and taxes related
to the making, commitment to make, failure to
take down or prepayment of loans thereunder or
the reservation of capital in connection
therewith.
GENERAL: 1. The loan documents will generally be governed by
Texas law.
2. The loan documents as ultimately executed
will constitute the complete agreement of the
parties thereto, without modification by this
summary of terms and conditions or any
discussions among representatives of Borrower,
Agent, Lenders, or any other parties.
3. The loan documents will provide that the
parties thereto will waive, to the maximum
extent not prohibited by law, any right to a
trial by jury or to claim or recover special,
exemplary, punitive or consequential damages,
under or in connection with the loan documents
as ultimately executed, or any negotiations,
transactions or events associated herewith or
therewith or contemplated hereby or thereby.
4. Each Lender will have the right to assign
all or part of its interest in the Credit
Facility at its discretion, subject to
Borrower's consent which shall not be
unreasonably withheld or required if an Event
of Default exists, provided that the amount of
each such assignment is not less than
$10,000,000. A processing fee in the
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<PAGE>
amount of $2,500 shall be due and payable to
Agent upon any assignment of all or part of any
Lender's interest in the Credit Facility. In
addition, each Lender shall have the right to
sell participations in its interest in the
Credit Facility, provided that the amount
thereof shall be at least $1,000,000 and that
no participant shall have the right to (i)
participate in setting the Borrowing Base or
(ii) approve any amendment to or waiver of the
loan documents except for material changes in
the amount and term of the Credit Facility.
5. Agent and Lenders shall have the right to
disclose any and all information they have
concerning Borrower, Subsidiaries, their
properties and the Credit Facility to NCMI and
any financial institution that may participate
in the syndication of the Credit Facility.
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<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
September 24, 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
September 24, 1996
