<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COSTILLA ENERGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2658940
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
MICHAEL J. GRELLA, PRESIDENT
COSTILLA ENERGY, INC.
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Richard T. McMillan R. Joel Swanson
Cotton, Bledsoe, Tighe & Dawson, Baker & Botts, L.L.P.
a Professional Corporation 910 Louisiana
500 West Illinois Houston, Texas 77002
Suite 300
Midland, Texas 79701
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER SHARE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.10 par value 4,600,000 $16.00 $73,600,000 $25,379
</TABLE>
(1) Includes an aggregate of 600,000 shares subject to an Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover of Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors; The Company; Pro
Forma Condensed Financial Statements; Selected
Financial Information
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. *
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page; Prospectus Summary;
Description of Capital Stock
10. Interests of Named Experts and Counsel............... *
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Company;
Dividend Policy; Capitalization; Pro Forma Condensed
Financial Statements; Selected Financial
Information; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business and Properties; Management; Certain
Transactions; Security Ownership of Certain
Beneficial Owners and Management; Executive
Compensation and Other Information; Description of
Certain Indebtedness; Description of Capital Stock;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
* Omitted because item is not applicable.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR ANY
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 ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION - DATED JULY 26, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
4,000,000 Shares
COSTILLA ENERGY, INC.
Common Stock
- -------------------------------------------------------------------------
All of the shares of the Common Stock, $0.10 par value (the "Common Stock"),
offered hereby (the "Common Stock Offering") are being sold by Costilla Energy,
Inc., a Delaware corporation ("Costilla" or the "Company").
Concurrently with the Common Stock Offering, the Company is offering
$100,000,000 of % Senior Subordinated Notes due 2006 (the "Notes") for sale
to the public (the "Notes Offering," and together with the Common Stock
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.
Prior to this Common Stock Offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price will be between $14.00 and $16.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company will apply for inclusion of the Common Stock
on The Nasdaq Stock Market's National Market (the "Nasdaq National Market")
under the trading symbol "COSE."
SEE "RISK FACTORS" ON PAGES 9 TO 13 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (3)..................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 600,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $ and
the total Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York, on
or about , 1996.
PRUDENTIAL SECURITIES INCORPORATED RAUSCHER PIERCE REFSNES, INC.
August , 1996
<PAGE>
COSTILLA ENERGY, INC.
GEOGRAPHIC FOCUS
[GRAPHIC MATERIAL, AND DESCRIPTION THEREOF FOR EDGAR, TO COME]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, FINANCIAL STATEMENTS AND OTHER DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE PRO FORMA INFORMATION GIVES EFFECT TO THE CONVERSION OF COSTILLA
FROM A LIMITED LIABILITY COMPANY TO A CORPORATION, CERTAIN MATERIAL ACQUISITIONS
AND THE OFFERINGS AND THE APPLICATION OF THE ESTIMATED NET PROCEEDS THEREFROM.
SEE "-- SIGNIFICANT ACQUISITIONS," "THE COMPANY -- CORPORATE REORGANIZATION,"
AND "USE OF PROCEEDS." AS USED HEREIN, REFERENCES TO THE COMPANY OR TO COSTILLA
ARE TO COSTILLA ENERGY, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED. CERTAIN OIL AND GAS TERMS USED IN THIS PROSPECTUS
ARE DEFINED IN THE "GLOSSARY" INCLUDED HEREIN.
THE COMPANY
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin, the Gulf Coast and the Rocky Mountain
regions. The Company's strategy focuses on increasing reserves through a
targeted exploration program, the exploitation of its existing properties and
selective property acquisitions. In addition, the Company recently acquired an
interest in a concession for the development of mineral interests in the
Republic of Moldova, in Eastern Europe. The Company also has minor interests in
the domestic gas gathering and transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of March 31, 1996, the Company had total
estimated net proved reserves of 16.5 Mmbbls of oil and 112.9 Bcf of gas,
aggregating 35.3 MMBOE, with a PV-10 Value of approximately $179.5 million,
assuming the 1996 Acquisition (as defined below) had occurred at March 31, 1996.
The Company also has a substantial undeveloped acreage position consisting of
205,908 gross (141,384 net) acres. The Company has identified in excess of 200
drilling locations of which 82 are included in its proved reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 23 wells based on these
3-D surveys, 20 of which have been productive. The Company has recently
completed a third 3-D survey in Pecos County, Texas and intends to commence
drilling on this acreage in the second half of 1996. Moreover, the Company is
currently conducting two additional 3-D surveys. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and EBITDA. The Company increased its estimated proved reserves from
6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at March 31, 1996 (pro forma for
the 1996 Acquisition), representing a compound annual growth rate of 114%. This
reserve growth has been achieved at an average all-in finding cost of $3.49 per
BOE over such period, a level which the Company believes is lower than industry
averages. Concurrently, the Company increased its average net daily production
from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for the three
months ended March 31, 1996 (pro forma for the 1996 Acquisition), representing a
compound annual growth rate of 195%. EBITDA increased at a 240% compound annual
growth rate from $1.8 million for 1993 to $20.8 million for 1995 (pro forma for
the 1995 Acquisition and the 1996 Acquisition).
3
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a diverse portfolio of
properties. The Company also seeks to manage the elements of its business
strategy through the operation of a significant portion of its properties, the
use of a disciplined rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- EXPLORATION EFFORTS. The Company uses extensive geological and
geophysical analysis to carefully focus its 3-D seismic surveys. This
focus allows the Company to successfully direct the size and scope of its
exploration program in order to improve the likelihood of success while
managing overall exploration costs. The Company's exploration efforts are
concentrated currently on known producing regions. The Company plans to
drill 26 exploratory wells during the remainder of 1996 and 36 exploratory
wells in 1997. Capital budgeted for exploration activities is $8.4 million
for the last nine months of 1996 and $10.8 million for 1997.
- EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers, infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.9 million
for the last nine months of 1996 and $9.2 million for 1997, which includes
the drilling of 17 development wells in 1996 and 13 development wells in
1997.
- PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying
and developing previously unproved reserves on acquired acreage. The
Company seeks to acquire reserves which will fit its existing portfolio,
are generally not being actively marketed and where a negotiated sale
would be the method of purchase. The Company does not rely on major oil
company divestitures or property auctions.
- PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities
in distinct regions it is able to reduce commodity price and other
operational risks. The Company's Moldovan interest is an extension of this
strategy and can be characterized by low initial costs, significant
reserve potential and the availability of technical data that may be
further developed by the Company.
- CONTROL OF OPERATIONS. The Company prefers to operate and own the
majority working interest in its properties. This allows the Company
greater control over future development, drilling, completing and lifting
costs and marketing of production. At December 31, 1995, the Company
operated wells constituting approximately 65% of its total PV-10 Value
(pro forma for the 1996 Acquisition).
4
<PAGE>
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 6.9 Mmbbls of oil and 40.0 Bcf of gas, aggregating
13.6 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At March 31, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at March 31, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 42,855 gross
(10,172 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
DRILLING ACTIVITIES
Exploration efforts since January 1, 1996 include the drilling of two
successful wells located on the Company's Edwards/McElroy Ranch 3-D Prospect in
the Permian Basin. Production from the initial well averaged 344 BOE per day
from its May 11 completion to June 30, 1996, while the second well is currently
being completed. These successful wells confirm the Company's seismic
interpretation of the continuation of a significant trend. As a result, the
Company has identified 75 additional drilling locations, three of which are
included in the Company's proved reserves. Through June 30, 1996, the Company
had drilled 11 total wells in the prospect, 10 of which have been completed as
producing wells.
The Company has also drilled three exploratory wells in the McGyver-Green
Acres 3-D Prospect since January 1, 1996, yielding two successful completions
and bringing the total number of wells drilled in that prospect to 12. The
average daily production from the 11 producing wells in this prospect is
approximately 83 BOE per well. The Company has identified 41 additional drilling
locations in the McGyver-Green Acres Prospect, 14 of which are included in the
Company's proved reserves.
The Company has also drilled and completed five development wells in the
Permian Basin and Gulf Coast regions since the beginning of 1996. Currently, the
Company's principal exploitation activities include a carbon dioxide flood in
the East Goldsmith Unit, infill drilling primarily in the Permian Basin and
horizontal drilling in the Susan Peak Field.
5
<PAGE>
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............ 4,000,000 Shares(1)
Common Stock to be Outstanding after the
Offering...................................... 10,000,000 Shares(1)
Concurrent Notes Offering...................... Concurrently with the Common Stock
Offering, the Company is offering
$100,000,000 of % Senior Subordinated
Notes due 2006. See "Notes Offering." The
closing of the Notes Offering and the
Common Stock Offering are each conditioned
upon the consummation of the other.
Use of Proceeds................................ To repay existing indebtedness, to pay
certain costs incurred in connection with
the Corporate Reorganization, and for
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol.................. COSE
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's employee benefit plans. See "Executive Compensation and Other
Information."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary historical and pro forma
financial data of the Company. The historical data should be read in conjunction
with the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus. The Company acquired significant producing oil and
gas properties in certain of the periods presented which affect the
comparability of the historical financial and operating data for the periods
presented. The pro forma information should be read in conjunction with the Pro
Forma Condensed Financial Statements and notes thereto included elsewhere in
this Prospectus. Neither the historical results nor the pro forma results are
necessarily indicative of the Company's future operations or financial results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- -------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------- ----------- -------------------- ---------
1993 1994 1995 1995(1) 1995 1996 1996(1)
--------- --------- --------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 4,397 $ 7,836 $ 21,816 $ 52,637 $ 2,180 $ 8,951 $ 14,038
Expenses:
Oil and gas production................... 1,688 2,351 10,355 26,937 896 3,659 6,283
General and administrative............... 952 1,184 3,571 4,850 459 1,362 1,505
Exploration and abandonments............. 218 793 1,650 2,761 1,007 228 475
Depreciation, depletion and
amortization............................ 884 1,847 6,095 14,313 462 1,986 3,166
Interest................................. 605 1,458 4,454 11,631 407 1,704 2,908
Other.................................... -- -- 2 2 -- -- --
Net income (loss) before income taxes...... 50 203 (4,311) (7,857) (1,051) 12 (299)
Pro forma earnings (loss) per common
share..................................... -- -- -- (0.80) -- -- (0.03)
Pro forma weighted average common shares
outstanding............................... -- -- -- 9,861 -- -- 10,000
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities..................... $ 322 $ 1,527 $ 6,366 -- $ (1,827) $ 2,276 --
Investing activities..................... (6,731) (12,146) (62,467) -- (1,389) (5,132) --
Financing activities..................... 6,315 10,618 58,830 -- 3,272 3,000 --
OTHER FINANCIAL DATA:
Capital expenditures....................... $ 6,862 $ 11,868 $ 62,220 -- $ 1,389 $ 5,132 --
EBITDA (2)................................. 1,757 4,301 7,888 $ 20,848 825 3,930 $ 6,250
EBITDA/Interest expense (3)................ 2.9x 2.9x 1.8x 1.8x 2.0x 2.3x 2.1x
Ratio of earnings to fixed charges (4)..... 1.0 1.1 -- -- -- 1.0 --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital............................ $ 1,612 $ 1,081 $ 2,496 -- -- $ 2,104 $ 15,955
Total assets............................... 13,365 24,904 87,367 -- -- 91,024 145,117
Total debt................................. 12,006 23,591 71,494 -- -- 74,494 100,000
Redeemable members' capital................ -- -- 11,320 -- -- 11,678 --
Members' capital........................... 51 (747) (7,189) -- -- (7,535) --
Pro forma stockholders' equity............. -- -- -- -- -- -- 35,843
</TABLE>
- ------------------------------
(1) Assumes that the 1995 Acquisition, the 1996 Acquisition, the Corporate
Reorganization (as defined in "The Company-- Corporate Reorganization") and
the Offerings and the application of proceeds therefrom had taken place on
March 31, 1996 for purposes of the Balance Sheet Data (to the extent not
already reflected) and as of January 1, 1995 for purposes of Statement of
Operations Data and Other Financial Data.
(2) EBITDA is presented because of its wide acceptance as a financial indicator
as to a company's ability to service or incur debt. EBITDA (as used herein)
is calculated by adding interest, income taxes, depreciation, depletion and
amortization and exploration and abandonment costs to net income (loss).
EBITDA should not be considered as an alternative to earnings (loss) as an
indicator of the Company's financial performance or to cash flow as a
measure of liquidity.
(3) Calculated by dividing EBITDA by interest. Interest includes interest
expense accrued and amortization of deferred financing costs.
(4) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) plus income taxes and fixed charges. Fixed
charges are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of
7
<PAGE>
operating lease expense which is deemed to be representative of an interest
factor. Earnings were insufficient to cover fixed charges by $4,314,000,
and $1,051,000 for the historical periods ended December 31, 1995 and March
31, 1995, respectively and $7,857,000 and $299,000 for the pro forma
periods ended December 31, 1995 and March 31, 1996, respectively.
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1996
------------------------------- ------------------------
1993 1994 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES (2):
Oil (MBbls).............................................. 2,365 4,009 10,788 11,479 16,476
Gas (Mmcf)............................................... 21,619 27,512 78,152 79,420 112,920
MBOE (6 Mcf/Bbl)......................................... 5,968 8,594 23,813 24,716 35,297
Percent of proved developed reserves..................... 67.0% 62.3% 76.1% 73.9% 78.2%
Present value of estimated future net cash flow, before
income taxes, discounted at 10% (in thousands).......... $ 26,377 $ 36,779 $ 113,296 $ 129,091 $ 179,527
Reserve life index (in years) (3)........................ 19.7 14.4 13.6 -- --
RESERVE REPLACEMENT DATA:
Production replacement ratio (4)......................... 513% 549% 969% -- --
All-in finding costs per BOE (5)......................... $ 4.31 $ 3.67 $ 3.53 $ 2.84 $ 2.84
</TABLE>
- ------------------------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if such
transactions had occurred as of January 1, 1995.
(2) Estimates of net proved oil and gas reserves at March 31, 1996 are based on
reports prepared by Williamson Petroleum Consultants, Inc. ("Williamson"),
independent petroleum engineers. The 1995 reserve estimates were prepared by
the Company and such estimates of gross reserves with respect to certain of
the Company's producing properties were subject to a limited review by
Williamson. Prior reserve estimates are based on information compiled by the
Company. See "Risk Factors -- Uncertainty of Estimates of Proved Reserves
and Future Net Revenues" and "Business and Properties -- Oil and Gas
Reserves."
(3) Calculated by dividing year-end proved reserves by annual production for the
most recent year.
(4) Calculated by dividing reserve additions through acquisitions of reserves,
extensions and discoveries and revisions during the year by production for
such year.
(5) The average all-in finding costs over the period January 1, 1993 through
March 31, 1996 (pro forma for the 1996 Acquisition) was $3.49 per BOE.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
THREE MONTHS ENDED MARCH 31,
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 2,085 338 502
Gas (Mmcf)...................................... 865 1,600 4,806 11,985 1,643 2,832
MBOE............................................ 302 597 1,751 4,083 612 974
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl)................................... $ 16.93 $ 15.25 $ 15.53 $ 15.75 $ 17.32 $ 17.37
Gas (per Mcf)................................... 1.82 1.63 1.45 1.59 1.81 1.88
COSTS PER BOE:
Production costs, including severance taxes
(2)............................................ $ 5.59 $ 3.94 $ 5.91 $ 6.60 $ 5.98 $ 6.45
Depreciation, depletion and amortization........ 2.93 3.09 3.48 3.51 3.25 3.25
</TABLE>
- ------------------------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if such
transactions had occurred as of January 1, 1995.
(2) Production costs per BOE in 1995 and for the three months ended March 31,
1996 were unusually high as a result of relatively high workover expenses
with respect to properties acquired in the 1995 Acquisition which did not
produce related production improvements until subsequent periods. In
addition, the Company expended approximately $1.6 million during 1995 in one
field in the Permian Basin primarily for plugging wells to comply with
applicable regulatory requirements.
8
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, among others,
statements regarding oil and gas reserves, future drilling and operations,
future production of oil and gas and future net cash flows. Actual results could
differ materially from those projected in the forward-looking statements as a
result of various factors, including, without limitation, those set forth below
and elsewhere in this Prospectus. Investors should carefully consider the
following factors, in addition to other information contained in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
SIGNIFICANT LEVERAGE AND DEBT SERVICE. As of March 31, 1996, as adjusted
for the 1996 Acquisition, the Corporate Reorganization, the Offerings and the
application of the net proceeds therefrom, the Company's total debt and
stockholders' equity would have been $100.0 million and $35.8 million,
respectively. See "Capitalization." In addition, the Company may currently incur
additional indebtedness under its Credit Facility (as defined under "Description
of Certain Indebtedness"). Immediately following the consummation of the
Offerings, the Company anticipates that the Credit Facility will afford it $50.0
million of available borrowing capacity, none of which is expected to be
outstanding on such date. See "Description of Certain 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 (the
"Indenture") will require the Company to meet certain financial tests, and other
restrictions may limit its ability to borrow additional funds or to dispose of
assets and may affect the Company's flexibility in planning for, and reacting
to, changes in its business, including possible acquisition activities and (iii)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. Based upon the current and
anticipated level of operations, the Company believes that its cash flow from
operations, together with amounts available under its Credit Facility and its
other sources of liquidity, will be adequate to meet its anticipated
requirements in the foreseeable future for working capital, capital
expenditures, interest payments and scheduled principal payments. There can be
no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. If the Company is unable to generate
sufficient cash flow from operations in the future to service its debt, it may
be required to refinance all or a portion of its existing debt including the
Notes, or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained.
RESTRICTIONS IMPOSED BY LENDERS. The instruments governing the indebtedness
of the Company and its subsidiaries impose significant operating and financial
restrictions on the Company. The terms of the Indenture governing the Notes and
the Credit Facility affect, and in many respects significantly limit or
prohibit, among other things, the ability of the Company to incur additional
indebtedness, pay dividends, repay indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. These restrictions could also
limit the ability of the Company to effect future financing, make needed capital
expenditures, withstand a future downturn in the Company's business or the
economy in general, or otherwise conduct necessary corporate activities. A
failure by the Company to comply with these restrictions could lead to a default
under the terms of such indebtedness. In the event of default, the holders of
such indebtedness could elect to declare all of the funds borrowed pursuant
thereto to be due and payable together with accrued and unpaid interest. In such
event, there can be no assurance that the Company would be able to make such
payments or borrow sufficient funds from alternative sources to make any such
payment. Even if additional financing could be obtained, there can be no
assurance that it would be on terms that are favorable or acceptable to the
Company. In addition, the Company's indebtedness under its Credit
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<PAGE>
Facility is expected to be secured by a substantial portion of the assets of the
Company and its subsidiaries. The pledge of such collateral to existing lenders
could impair the Company's ability to obtain additional financing. See
"Description of Certain Indebtedness."
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER. The Indenture
governing the Notes provides that upon the occurrence of a Change of Control,
the Company is required to offer to repurchase any or all of the outstanding
Notes at a price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase.
Generally, a "Change of Control" includes any person or group other than Cadell
S. Liedtke, Michael J. Grella and Henry G. Musselman, the Chairman of the Board,
President and Executive Vice President of the Company, respectively, acquiring
50% or more of the voting securities of the Company, and certain other events.
If a Change of Control occurs, there is no assurance that the Company will have
available funds sufficient to pay for the Notes tendered for repurchase. If an
offer to repurchase is required to be made and the Company does not have
available funds sufficient to pay for Notes tendered for repurchase, an event of
default would occur under the Indenture.
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH
FLOWS. There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Prospectus are estimates only.
Reserve estimates are imprecise and should be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be exactly measured, and
the accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Accordingly,
estimates of the economically recoverable quantities of oil and gas attributable
to any particular group of properties, classifications of such reserves based on
risk of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially. Moreover, there can be no assurance that the reserves set
forth herein will ultimately be produced or that the proved undeveloped reserves
will be developed within the periods anticipated. Variances from the estimates
contained herein could be material. In addition, the estimates of future net
revenues from proved reserves of the Company and the present value thereof are
based upon certain assumptions about production levels, prices and costs, which
may not be correct. The Company emphasizes with respect to such estimates that
the discounted future net cash flows should not be construed as representative
of the fair market value of the proved oil and gas properties belonging to the
Company, because discounted future net cash flows are based upon projected cash
flows that do not provide for changes in oil and gas prices or for escalation of
expenses and capital costs. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were based.
Actual results may differ materially from the results estimated. Prospective
purchasers of shares of Common Stock offered hereby 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.
10
<PAGE>
DRILLING RISKS. Drilling involves numerous risks, including the risk that
no commercially productive oil or gas will be encountered. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or cancelled as a result of a variety of factors,
including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future drilling
activities may not be successful and, if unsuccessful, such failure may have a
material adverse effect on the Company's future results of operations and
financial condition.
OPERATING HAZARD AND UNINSURED RISKS. The Company's operations are subject
to hazards and risks inherent in the drilling for and production and
transportation of oil and gas, including fires, natural disasters, explosions,
encountering formations with abnormal pressures, blowouts, cratering, pipeline
ruptures, and spills, any of which can result in loss of hydrocarbons,
environmental pollution, personal injury or loss of life, severe damage to and
destruction of properties of the Company and others, and suspension of
operations. Although the Company maintains insurance coverage that it considers
to be adequate and customary in the industry, it is not fully insured against
certain of these risks, either because such insurance is not available or
because of high premium costs. The occurrence of a significant event not fully
covered by insurance could have a material adverse effect on the Company's
financial condition and results of operations.
COMPETITION. The Company encounters substantial competition in acquiring
properties, marketing oil and gas and securing trained personnel. Many
competitors have substantially larger financial resources, staffs and
facilities. See "Business and Properties -- Competition and Markets."
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."
DEPENDENCE ON KEY PERSONNEL. The Company depends to a large extent on the
services of Messrs. Liedtke, Grella and Musselman. The loss of the services of
any of Messrs. Liedtke, Grella or Musselman could have a material adverse effect
on the Company's operations. Pursuant to employment agreements which are to be
effective upon the consummation of the Offerings, Messrs. Liedtke, Grella and
Musselman have agreed not to compete with the Company for a one year period
should they voluntarily leave the Company's employment or should their
employment be terminated for cause. The Company believes that its success is
also dependent upon its ability to continue to employ and retain skilled
technical personnel. See "Management."
CONTROL OF THE COMPANY. If the Offerings are completed, Messrs. Liedtke,
Grella and Musselman will own directly and indirectly, in the aggregate, 49.2%
of the outstanding Common Stock (or 46.4% if the Underwriters' over-allotment
option in the Common Stock Offering is exercised in full). Accordingly, Messrs.
Liedtke, Grella and Musselman will be able to exercise significant influence
over the election of the directors of the Company and the control of the
Company's management, operations and affairs. The voting power held by such
principal stockholders and their ability to exercise significant influence over
the election
11
<PAGE>
of directors may have the effect of discouraging certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of Common Stock might otherwise receive a
premium for their shares over then current market prices. See "Security
Ownership of Certain Beneficial Owners and Management" and "Description of
Capital Stock."
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.
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 FOR THE COMMON STOCK AND POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to the Common Stock Offering, there has been no public
market for the Common Stock of the Company and there can be no assurance that an
active trading market will develop or be sustained after the Common Stock
Offering, or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price of the
Common Stock will be determined through negotiations between the Company and the
Underwriters, and may bear no relationship to the market price of the Common
Stock after the Common Stock 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 Common Stock to fluctuate substantially. See "Underwriting."
DILUTION. Purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value per
share of Common Stock from the initial public offering price set forth on the
cover of this Prospectus. Such dilution to new investors will be $11.80 per
share
12
<PAGE>
(assuming an initial public offering price of $15.00 per share), while the pro
forma net tangible book value of the shares of Common Stock owned by the
existing stockholders will increase by $5.79 per share. See "Dilution."
NO INTENTION TO PAY DIVIDENDS. The Company intends to retain future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. In addition, the payment of dividends by
the Company is limited and restricted by the Credit Facility and under the terms
of the Indenture governing the Notes. See "-- Restrictions Imposed by Lenders,"
"Dividend Policy" and "Description of Certain Indebtedness."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS. The Company's Certificate of Incorporation and bylaws
provide that (i) the Company's Directors will be divided into classes, with the
directors of each class serving staggered terms of three years each or until
their respective successors are elected and qualified, and (ii) the Board of
Directors may issue serial preferred stock with such rights and preferences as
the Board may determine, without stockholder approval. These provisions may have
the effect, either alone or in combination, of making more difficult or
discouraging an acquisition or potential acquisition of the Company which is
deemed undesirable by the Board of Directors. See "Description of Capital Stock
- -- Anti-Takeover Provisions."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock on the public market after the Common Stock Offering could adversely
affect the market price of the Common Stock. Upon completion of the Common Stock
Offering, the Company will have a total of 10,000,000 shares of Common Stock
outstanding. Of these shares, the 4,000,000 shares of Common Stock offered
hereby (4,600,000 shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradeable without restriction or registration under the
Securities Act of 1933 (the "Securities Act") by persons other than "affiliates"
of the Company, as defined under the Securities Act. The remaining 6,000,000
shares of Common Stock outstanding will be "restricted securities" as that term
is defined by Rule 144 as promulgated under the Securities Act. The Company
currently has only one option outstanding for 75,000 shares. See "Executive
Compensation and Other Information."
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), approximately 4,919,992 of the 6,000,000 restricted shares will
become eligible for sale 90 days after the Common Stock Offering. All 6,000,000
of the restricted shares are subject to lockup restrictions as described below.
The holders of these shares, which include certain of the Company's executive
officers and directors and NationsBanc Capital Corp. ("NBCC"), have agreed that
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract to sell, pledge, grant of any
options to purchase or sale or disposition) of any shares of Common Stock or
other capital stock of the Company, or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for a period of 180 days from the
date of this Prospectus. After such 180-day period, this restriction will expire
and shares permitted to be sold under Rule 144 would be eligible for sale. In
addition, NBCC has demand registration rights to require the Company to file up
to two registration statements to effect the registration under the Securities
Act of the shares of Common Stock held by such holder, and the other majory
stockholders have "piggyback" registration rights, which would permit such
holders to resell such shares without complying with Rule 144. Registration and
sale of such shares could have an adverse effect on the trading price of the
Common Stock. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
Prior to the Common Stock Offering, there has been no public market for the
Common Stock and no predictions can be made of the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
13
<PAGE>
THE COMPANY
GENERAL
The Company is an independent energy company that is engaged in the
acquisition, exploration, exploitation and development of oil and gas
properties. The Company's primary operations are in the Permian Basin, the Gulf
Coast and the Rocky Mountain regions. The Company recently acquired an interest
in a concession for the development of mineral interests in the Republic of
Moldova, in Eastern Europe. The Company also has minor interests in the domestic
gas gathering and transmission business.
CORPORATE REORGANIZATION
Costilla was incorporated in Delaware in June 1996 to consolidate and
continue the activities previously conducted by Costilla Energy, L.L.C., a Texas
limited liability company (the "LLC"), and its wholly owned subsidiaries, to
acquire the assets of CSL Management Corporation ("CSL") (which owns certain
office equipment used by the Company)., and to acquire the stock of Valley
Gathering Company ("Valley"). Both CSL and Valley are owned by Messrs. Liedtke,
Grella and Musselman. See "Certain Transactions."
Contemporaneously with the closings of the Offerings: (1) the redeemable
membership interests of NBCC in the LLC will be redeemed for $15.4 million; (2)
the LLC will be merged into Costilla (the "Merger") and an aggregate of
6,000,000 shares of Common Stock will be issued to the four members of the LLC;
(3) Costilla will acquire all of the issued and outstanding stock of Valley and
the assets of CSL for $0.7 million; and (4) $4.3 million in distributions will
be made to the members of the LLC, $3.5 million of which, in the case of Messrs.
Liedtke, Grella and Musselman, will be provided to such persons for certain
estimated income tax effects of the Merger. These transactions are referred to
throughout this Prospectus as the "Corporate Reorganization." As a result of the
Corporate Reorganization, Costilla will have four wholly owned subsidiaries: (i)
Costilla Petroleum Corporation, a Texas corporation ("CPC"), which operates
properties owned by Costilla and owns minor interests in the same properties;
(ii) Statewide Minerals Corporation, a Texas corporation ("Statewide"), which is
engaged in the purchase of small royalty and mineral interests; (iii) Valley,
which owns several small gas gathering systems, a small gas processing plant,
certain salt water disposal systems and gas compressors; and (iv) Costilla
Pipeline Company, a Texas corporation ("Pipeline"), which owns a gas pipeline in
Pennsylvania held for resale. CSL will be dissolved. Costilla and CPC are the
sole members of two Texas limited liability companies through which the
Company's Moldovan operations are conducted. Costilla also owns a 45.0% interest
in a Texas limited liability company which owns and operates a gas pipeline and
associated facilities in Louisiana.
The Company's executive offices are located at 400 West Illinois, Suite
1000, Midland, Texas, 79701 and its telephone number is (915) 683-3092.
NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is offering
$100,000,000 of % Senior Subordinated Notes due 2006. The Notes Offering and
the Common Stock Offering are each conditioned upon the consummation of the
other.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Common Stock Offering are expected
to be $55.6 million, based upon an initial public offering price of $15.00 per
share after deducting underwriting discounts and commissions and estimated
offering expenses to the Company ($64.0 million if the Underwriters' over-
allotment option is exercised). The net proceeds to the Company from the Notes
Offerings are estimated to be $96.2 million. Approximately $125 million of such
proceeds, including all the net proceeds of the Notes Offering, will be used to
repay all of the existing senior indebtedness of the Company (the "Existing
Debt") incurred in connection with the 1996 Acquisition, and to refinance its
previous credit facility. The Existing Debt matures in June 1999. Approximately
$30 million of the Existing Debt currently bears interest at 14.0% per annum and
the balance currently bears interest at a rate selected by the Company equal to
a base rate (generally the prime rate established by NationsBank, N.A.) plus
0.75% or LIBOR plus 3.0%. See "Description of Certain Indebtedness." In
addition, $20.4 million of the net proceeds will be used to pay certain amounts
incurred in connection with the Corporate Reorganization, including $15.4
million to redeem certain membership interests of NBCC in the LLC prior to the
Merger, $0.7 million to acquire the stock of Valley and the assets of CSL and
$4.3 million in distributions to the members of the LLC, $3.5 million of which,
in the case of Messrs. Liedtke, Grella and Musselman, will be provided to such
persons for certain estimated federal income tax effects of the Merger. See
"Certain Transactions." The remaining estimated net proceeds of $6.4 million
will be used by the Company for general corporate purposes.
The following is a description of sources and uses of proceeds from the
Offerings, assuming the Underwriters' over-allotment option in connection with
the Common Stock Offering is not exercised (in millions):
<TABLE>
<S> <C>
Sources:
Notes Offering............................................................ $ 100.0
Common Stock Offering..................................................... 60.0
---------
$ 160.0
---------
---------
Uses:
Refinance Existing Debt................................................... $ 125.0
Redeem membership interests............................................... 15.4
Distributions to individual members to pay estimated income tax liability
of such members.......................................................... 3.5
Pro rata distribution to remaining member................................. 0.8
Purchase of stock of Valley and assets of CSL............................. 0.7
Working capital........................................................... 6.4
Estimated fees, commissions, underwriting discounts and expenses related
to the Offerings......................................................... 8.2
---------
$ 160.0
---------
---------
</TABLE>
DIVIDEND POLICY
The Company intends to retain future earnings for use in its business and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. The terms of the Credit Facility are expected to limit or prohibit the
payment of dividends by the Company. In addition, the Indenture governing the
Notes also contains provisions restricting the payment of dividends (or other
restricted payments) generally to (i) 50% of consolidated net income of the
Company (less 100% of losses) for the period commencing the first fiscal quarter
after the closing of the Offerings to the most recently ended fiscal quarter,
plus (ii) 100% of certain equity sales after the date of the Indenture. Subject
to the restrictions imposed by the Company's lenders, future dividend policy
will depend on a number of factors, including future earnings, capital
requirements, the financial condition and future prospects of the Company and
such other factors as the Board of Directors may deem relevant.
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<PAGE>
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. At March 31, 1996, the net tangible book value
per share of Common Stock of the Company, on a pro forma basis after giving
effect to the issuance of 6,000,000 shares in the Merger and the redemption of
certain membership interests in the LLC was ($2.59). Such amount does not give
effect to the Offerings or to the distributions to members of the LLC in the
Corporate Reorganization. Net tangible book value per share represents the
amount of the Company's tangible book value (total book value of tangible assets
less total liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect to the receipt of $55.6 million of estimated
proceeds from the Common Stock Offering, the issuance of the Notes in the Notes
Offering and the completion of the Corporate Reorganization, the net tangible
book value of the Common Stock outstanding at March 31, 1996 would have been
$32.0 million or $3.20 per share, representing an immediate increase in net
tangible book value of approximately $5.79 per share to current stockholders and
an immediate dilution of $11.80 per share (the difference between the assumed
initial public offering price and the net tangible book value per share after
the Offerings) to persons purchasing Common Stock at the assumed initial public
offering price. The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price............................... $ 15.00
Net tangible book value before Offerings.................. $ (2.59)
Increase in net tangible book value attributable to sale
of Common Stock in the Common Stock Offering............. 5.79
---------
Net tangible book value after giving effect to the
Offerings.................................................. 3.20
---------
Dilution in net tangible book value to new investors........ $ 11.80
---------
---------
</TABLE>
Messrs. Liedtke, Grella and Musselman will receive 4,919,992 shares of
Common Stock in the Corporate Reorganization. These shares of Common Stock will
be issued to such persons in exchange for the membership interests in the LLC.
The effective cash cost of these shares to Messrs. Liedtke, Grella and
Musselman, on a per share basis, is not significant. In February 1995, upon
formation of the LLC, NBCC contributed $10,000,000 in cash in exchange for a 30%
membership interest in the LLC. Forty percent of such interest was immediately
redeemable for $10,000,000 plus a premium. Therefore, the effective cost of the
1,080,008 shares of Common Stock to be received by NBCC in the Corporate
Reorganization is deemed to be zero.
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of March 31, 1996, on an historical basis and on a pro forma basis giving
effect to the 1996 Acquisition, the Corporate Reorganization and the Offerings
and the application of the net proceeds therefrom, as if such transactions had
been consummated as of March 31, 1996, assuming an initial public offering price
for the Common Stock in the Common Stock Offering of $15.00 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 Certain Indebtedness" and Note 7 and Note 12 of the
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Existing debt........................................................................... $ 74,494 $ --
Credit Facility......................................................................... -- --
% Senior Subordinated Notes due 2006................................................. -- 100,000
----------- -----------
Total long-term debt...................................................................... 74,494 100,000
----------- -----------
Redeemable members' capital............................................................... 11,678 --
----------- -----------
Members' capital and stockholders' equity:
Members' capital........................................................................ (7,535) --
Preferred stock, $.10 par value (3,000,000 shares authorized; no shares issued or
outstanding)........................................................................... -- --
Common Stock, $.10 par value (20,000,000 shares authorized; no shares outstanding
actual, 10,000,000 shares outstanding pro forma)....................................... -- 1,000
Paid-in capital......................................................................... -- 34,843
----------- -----------
Total members' capital and stockholders' equity........................................... ( 7,535) 35,843
----------- -----------
Total capitalization...................................................................... $ 78,637 $ 135,843
----------- -----------
----------- -----------
</TABLE>
17
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Financial Statements of the Company have
been prepared to give effect to the 1995 Acquisition and the 1996 Acquisition,
the Corporate Reorganization, and the Offerings and the application of the
estimated net proceeds therefrom as if such transactions (to the extent not
already reflected) had taken place on March 31, 1996 for purposes of the Pro
Forma Condensed Balance Sheet and as if the transactions had taken place on
January 1, 1995 for purposes of the Pro Forma Condensed Statements of
Operations. The Pro Forma Condensed Financial Statements of the Company are not
necessarily indicative of the results for the periods presented had the 1995
Acquisition and the 1996 Acquisition, the Corporate Reorganization, and the
Offerings and the application of the estimated net proceeds therefrom taken
place on January 1, 1995. In addition, future results may vary significantly
from the results reflected in the accompanying Pro Forma Condensed Financial
Statements because of normal production declines, changes in product prices, and
the success of future exploration and development activities, among other
factors. This information should be read in conjunction with the Consolidated
Financial Statements of Costilla Energy, L.L.C. and subsidiaries, and the
Statements of Revenues and Direct Operating Expenses with respect to the
properties acquired in the 1995 Acquisition and the 1996 Acquisition, all
included elsewhere herein.
18
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED BALANCE SHEET -- UNAUDITED
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRE OFFERING PRO FORMA COSTILLA
PRO FORMA COSTILLA OFFERING ENERGY,
ASSETS COSTILLA L.L.C. ADJUSTMENTS L.L.C. ADJUSTMENTS INC.
- ------------------------------------------------------ --------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,760 $ (700)(3) $ 2,060 $ (4,259)(4) $ 13,498
151,800(5)
(136,103)(6)
Restricted cash..................................... 250 250 250
Accounts receivable................................. 7,584 7,584 7,584
Prepaid and other current assets.................... 800 800 800
------- ------------- -----------
Total current assets............................ 11,394 10,694 22,132
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties................................... 83,965 40,500(1) 124,465 124,465
Unproved properties................................. 3,580 3,580 3,580
Accumulated depreciation, depletion and
amortization....................................... (11,281) (11,281) (11,281)
------- ------------- -----------
76,264 116,764 116,764
Other property and equipment, net..................... 1,024 700(3) 1,724 1,724
Deferred charges (Note 2)............................. 1,658 3,650(1) 3,650 3,813(5) 3,813
(1,658)(2) (3,650)(6)
Note receivable -- affiliate.......................... 684 684 684
------- ------------- -----------
$ 91,024 $ 133,516 $ 145,117
------- ------------- -----------
------- ------------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND EQUITY
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Trade accounts payable.............................. $ 6,190 $ (3,113)(1) $ 3,077 $ 3,077
Undistributed revenue............................... 1,026 1,026 1,026
Other current liabilities........................... 2,074 2,074 2,074
------- ------------- -----------
Total current liabilities....................... 9,290 6,177 6,177
Long-term debt, less current maturities............... 74,494 47,263(1) 121,757 $ 100,000(5) 100,000
(121,757)(6)
Deferred income....................................... 3,097 3,097 3,097
------- ------------- -----------
Total liabilities............................... 86,881 131,031 109,274
Redeemable members' capital........................... 11,678 11,678 (11,678)(6) --
Members' capital and capital of affiliates............ (7,535) (1,658)(2) (9,193) 9,193(4) --
Stockholders' equity.................................. -- -- (2,668)(6) 35,843
(4,259)(4)
(9,193)(4)
55,613(5)
(3,650)(6)
------- ------------- -----------
$ 91,024 $ 133,516 $ 145,117
------- ------------- -----------
------- ------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
19
<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
1995 1996 PRO FORMA COSTILLA OFFERING
COSTILLA L.L.C. ACQUISITION ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS
--------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 21,816 $ 10,930 $ 19,891 $ 52,637
Expenses:
Oil and gas production................ 10,355 5,473 11,409 $ (300)(3) 26,937
General and administrative............ 3,571 -- -- (172)(3) 4,850
1,451(7)
Exploration and abandonments.......... 1,650 109 1,002 2,761
Depreciation, depletion and
amortization......................... 6,095 -- -- 100(3) 14,313
8,118(8)
Interest.............................. 4,454 -- -- 9,388(9) 13,842 $ (2,211)(10)
Other................................. 2 -- -- 2
------- ----------- ----------- -------------
26,127 5,582 12,411 62,705
------- ----------- ----------- -------------
Net income (loss) before federal income
taxes.................................. (4,311) 5,348 7,480 (10,068)
Provision for federal income taxes...... 3 -- -- 3
------- ----------- ----------- -------------
Net income (loss)....................... $ (4,314) $ 5,348 $ 7,480 $ (10,071)
------- ----------- ----------- -------------
------- ----------- ----------- -------------
Net income (loss) per share.............
<CAPTION>
PRO FORMA
COSTILLA
ENERGY,
INC.
-----------
<S> <C>
Revenues................................ $ 52,637
Expenses:
Oil and gas production................ 26,937
General and administrative............ 4,850
Exploration and abandonments.......... 2,761
Depreciation, depletion and
amortization......................... 14,313
Interest.............................. 11,631
Other................................. 2
-----------
60,494
-----------
Net income (loss) before federal income
taxes.................................. (7,857)
Provision for federal income taxes...... 3
-----------
Net income (loss)....................... $ (7,860)
-----------
-----------
Net income (loss) per share............. $ (0.80)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
20
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
1996 PRO FORMA PRE OFFERING OFFERING
COSTILLA L.L.C. ACQUISITION ADJUSTMENTS COSTILLA L.L.C. ADJUSTMENTS
--------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 8,951 $ 5,087 $ 14,038
Expenses:
Oil and gas production................. 3,659 2,699 $ (75)(3) 6,283
General and administrative............. 1,362 (43)(3) 1,505
186(7)
Exploration and abandonments........... 228 247 475
Depreciation, depletion and
amortization.......................... 1,986 25(3) 3,166
1,155(8)
Interest............................... 1,704 2,330(9) 4,034 $ (1,126)(10)
------ ------ -------
8,939 2,946 15,463
------ ------ -------
Net income (loss) before federal income
taxes................................... 12 2,141 (1,425)
------ ------ -------
Net income (loss)........................ $ 12 $ 2,141 $ (1,425)
------ ------ -------
------ ------ -------
Net income (loss) per share..............
<CAPTION>
PRO FORMA
COSTILLA
ENERGY,
INC.
-----------
<S> <C>
Revenues................................. $ 14,038
Expenses:
Oil and gas production................. 6,283
General and administrative............. 1,505
Exploration and abandonments........... 475
Depreciation, depletion and
amortization.......................... 3,166
Interest............................... 2,908
-----------
14,337
-----------
Net income (loss) before federal income
taxes................................... (299)
-----------
Net income (loss)........................ $ (299)
-----------
-----------
Net income (loss) per share.............. $ (0.03)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The Pro Forma Condensed Financial Statements of the Company have been
prepared to give effect to the 1995 Acquisition and the 1996 Acquisition, the
Corporate Reorganization and the Offerings and the application of estimated net
proceeds therefrom, as if such transactions had taken place on March 31, 1996
for purposes of the Pro Forma Condensed Balance Sheet (with the exception of the
1995 Acquisition which was previously reflected in the balance sheet of Costilla
Energy, L.L.C.), and as if each of the transactions had taken place on January
1, 1995 for purposes of the Pro Forma Condensed Statements of Operations. The
1995 Acquisition and 1996 Acquisition are accounted for by the purchase method.
Costilla L.L.C. -- Represents the consolidated balance sheet of
Costilla Energy, L.L.C. and subsidiaries as of March 31, 1996 and the
related consolidated statements of operations for the year ended
December 31, 1995 and the three months ended March 31, 1996.
1995 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1995 Acquisition for the
period from January 1, 1995 to June 12, 1995 (date of the 1995
Acquisition).
1996 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1996 Acquisition for the year
ended December 31, 1995 and the three months ended March 31, 1996. The
1996 Acquisition was completed on June 14, 1996.
NOTE 2. -- PRO FORMA ENTRIES
(1) To record the issuance of additional long-term debt under the Existing
Debt Facility (as defined under "Description of Certain Indebtedness"), funded
on June 14, 1996 (net of amounts used to repay indebtedness under the previous
credit agreement), and to record the use of the net proceeds for the 1996
Acquisition, to pay debt issuance fees associated with the Existing Debt
approximating $3,650,000 (including amounts which would be required to be paid
in September 1996) and to reflect payment of certain trade accounts payable.
(2) To record the write-off of capitalized loan fees associated with the
previous credit agreement.
(3) To record the acquisition of Valley Gathering Company and CSL Management
Corporation from certain members of Costilla Energy, L.L.C. and to record the
related additional depreciation and amortization, and reduction in oil and gas
production and general and administrative expenses.
(4) To reflect the Corporate Reorganization including the transfer of
members' and affiliates' capital to stockholders' equity; and to reflect the
distribution of cash to certain members. See "Use of Proceeds."
(5) To reflect the issuance of 4,000,000 shares of Common Stock at an
estimated price of $15.00 per share for estimated proceeds of $55,613,000, net
of estimated expenses of the Common Stock Offering, and issuance of the Notes at
$100,000,000; and to reflect payment of related debt issuance expenses of
$3,812,000.
(6) To record the repayment of the Existing Debt and the write-off of
related debt issuance costs and the repurchase of redeemable members capital for
approximately $14,346,000 from proceeds of the Offerings.
(7) Estimated incremental general and administrative expenses necessary due
to estimated public reporting costs and increased personnel required to
administer the properties acquired in the 1996 Acquisition and to reflect
incremental general and administrative expenses due to the 1995 Acquisition
experienced subsequent to June 12, 1995.
(8) To record estimated incremental depletion expense for the properties
acquired in the 1995 Acquisition from January 1, 1995 through June 12, 1995
(date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 through March 31, 1996.
22
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. -- PRO FORMA ENTRIES (CONTINUED)
(9) To adjust interest expense to reflect additional borrowings for the
properties acquired in the 1995 Acquisition from January 1, 1995 to June 12,
1995 (date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition for the period of January 1, 1995 through March 31, 1996. The
adjustment also reflects adjusted interest expense due to the Existing Debt.
Also included is the amortization of estimated debt issuance costs of $3,650,000
over a three-year period.
(10) To adjust interest expense to reflect issuance of the Notes plus the
amortization of estimated debt issuance costs over 10 years.
NOTE 3. -- INCOME TAXES
Upon consummation of the Corporate Reorganization, the Company intends to
account for income taxes pursuant to the provisions of SFAS 109. At March 31,
1996, the pro forma tax basis of the Company's assets and liabilities exceeded
the pro forma book basis by approximately $6,400,000. The pro forma temporary
differences are primarily related to the differences in book and tax basis of
oil and gas properties due to the expensing of intangible development costs for
tax purposes and other income tax differences arising from the tax treatment of
oil and gas producing activities.
NOTE 4. -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based on the pro forma weighted
average shares outstanding during the respective periods. Weighted average
shares reflect the pro forma issuance of 1,080,008 shares of Common Stock to
NBCC on February 17, 1995 and the pro forma issuance of 4,919,992 shares of
Common Stock to the remaining holders prior to January 1, 1995. In addition, the
issuance of 4,000,000 shares in the Common Stock Offering is assumed to have
taken place on January 1, 1995 and assumes that the Underwriters' over-allotment
option is not exercised.
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
The estimates of proved oil and gas reserves, which are located in the
United States, were prepared by the Company as of December 31, 1993, 1994 and
1995, and Williamson as of March 31, 1996. Reserves were estimated in accordance
with guidelines established by the Securities and Exchange Commission and FASB
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the pro forma reserve
estimates utilizing an oil price of $17.79 per Bbl and a gas price of $2.03 per
Mcf as of December 31, 1995, and an oil price of $20.91 per Bbl and a gas price
of $2.02 per Mcf as of March 31, 1996. The pro forma 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
23
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise that those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND GAS
CONDENSATE (MBBLS) (MMCF)
------------------- -----------
<S> <C> <C>
Balance, January 1, 1995.............................................. 17,990 115,281
Revisions of previous estimates..................................... (570) 425
Extensions and discoveries.......................................... 605 8,922
Production.......................................................... (2,085) (11,984)
------- -----------
Balance, December 31, 1995............................................ 15,940 112,644
Revisions of previous estimates..................................... 436 2,614
Extensions and discoveries.......................................... 592 296
Production.......................................................... (492) (2,634)
------- -----------
Balance, March 31, 1996............................................... 16,476 112,920
------- -----------
------- -----------
Proved Developed Reserves:
December 31, 1995................................................... 13,235 87,345
March 31, 1996...................................................... 13,552 84,369
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying period-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future production of
proved oil and gas reserves less estimated future expenditures (based on
period-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on period-end
statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on pretax net cash flows less tax basis of properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Future cash flows........................................................ $ 512,363 $ 572,425
Future costs:
Production............................................................. (239,388) (253,347)
Development............................................................ (20,907) (22,076)
------------ --------------
Future net cash flows.................................................... 252,068 297,002
10% annual discount for estimated timing of cash flows................... (98,695) (117,475)
------------ --------------
Discounted future net cash flows......................................... 153,373 179,527
Future income taxes...................................................... (12,739) (22,302)
------------ --------------
Standardized measure of discounted net cash flows........................ $ 140,634 $ 157,225
------------ --------------
------------ --------------
</TABLE>
24
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
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>
25
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data of Costilla Energy,
L.L.C. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The historical information should be read in conjunction
with the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus. Costilla Energy, L.L.C. acquired significant
producing oil and gas properties in certain of the periods presented which
affect the comparability of the historical financial and operating information.
The historical results are not necessarily indicative of the Company's future
operations or financial results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues.......................... $ 1,623 $ 2,364 $ 4,231 $ 7,637 $ 21,693 $ 2,177 $ 8,833
Total revenues.............................. 2,134 2,887 4,397 7,836 21,816 2,180 8,951
Expenses:
Oil and gas production.................... 769 1,340 1,688 2,351 10,355 896 3,659
General and administrative................ 354 388 952 1,184 3,571 459 1,362
Exploration and abandonments.............. 106 4 218 793 1,650 1,007 228
Depreciation, depletion and
amortization............................. 494 404 884 1,847 6,095 462 1,986
Interest.................................. 179 365 605 1,458 4,454 407 1,704
Other..................................... -- -- -- -- 2 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before income taxes....... 232 386 50 203 (4,311) (1,051) 12
Net income (loss)........................... 234 368 73 163 (4,314) (1,051) 12
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities...................... $ 276 $ 140 $ 322 $ 1,527 $ 6,366 $ (1,827) $ 2,276
Investing activities...................... (2,659) (1,432) (6,731) (12,146) (62,467) (1,389) (5,132)
Financing activities...................... 2,440 1,450 6,315 10,618 58,830 3,272 3,000
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 3,092 $ 3,720 $ 6,862 $ 11,868 $ 62,220 $ 1,389 $ 5,132
Distributions to members.................... -- -- 456 961 55 55 --
EBITDA (1).................................. 1,011 1,159 1,757 4,301 7,888 825 3,930
EBITDA/Interest expense (2)................. 5.6x 3.2x 2.9x 2.9x 1.8x 2.0x 2.3x
Ratio of earnings to fixed charges (3)...... 1.3 1.5 1.0 1.1 -- -- 1.0
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital............................. $ (580) $ 185 $ 1,612 $ 1,081 $ 2,496 -- $ 2,104
Total assets................................ 4,602 6,675 13,365 24,904 87,367 -- 91,024
Total debt.................................. 2,870 5,304 12,006 23,591 71,494 -- 74,494
Redeemable members' capital................. -- -- -- -- 11,320 -- 11,678
Members' capital............................ 504 434 51 (747) (7,189) -- (7,535)
</TABLE>
- ------------------------------
(1) EBITDA is presented because of its wide acceptance as a financial indicator
as to a company's ability to service or incur debt. EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's financial performance or to cash flow as a measure of liquidity.
(2) Calculated by dividing EBITDA by interest. Interest includes interest
expense accrued and amortization of deferred financing costs.
(3) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) plus income taxes and fixed charges. Fixed
charges are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of operating lease expense which is deemed
to be representative of an interest factor. Earnings were insufficient to
cover fixed charges by $4,311,000, and $1,051,000 for the historical periods
ended December 31, 1995 and March 31, 1995, respectively.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's predecessor
began operating in 1988 and through mid-1995 had grown primarily through a
series of small acquisitions of oil and gas properties and the exploitation of
those properties. In June 1995, Costilla consummated the 1995 Acquisition for a
purchase price of approximately $46.6 million, and in June 1996, the 1996
Acquisition was consummated for a purchase price of approximately $42.5 million.
To date, the Company has achieved its high rate of growth primarily through
acquisitions. This has impacted its reported financial results in a number of
ways. Properties sold by others frequently have not received focused attention
prior to sale. After acquisition, certain of these properties are in need of
maintenance, workovers, recompletions and other remedial activity not
constituting capital expenditures, which substantially increase lease operating
expenses. The increased production and revenue resulting from these expenditures
is predominately realized in periods subsequent to the period of expense. In
addition, the rapid growth of the Company has required it to develop operating,
accounting and administrative personnel compatible with its increased size. The
Company believes it has now achieved a sufficient size to expand its reserve
base without a corresponding increase in its general and administrative expense.
The Company also believes it now has a sufficient inventory of prospects and the
professional staff necessary to follow a more balanced program of exploration
and exploitation activities to complement its acquisition efforts.
Costilla's strategy is to increase its oil and gas reserves, production and
cash flow from operations through a two-pronged approach which combines an
active exploration program with the acquisition and exploitation of proved
reserves. In addition, Costilla continues to evaluate the acquisition of
undeveloped acreage for its exploration efforts. Costilla has in-house
exploration expertise using 3-D seismic technology to identify new drilling
opportunities as well as for the exploitation of acquired properties.
Costilla has shown a significant increase in its oil and gas reserves,
production and EBITDA, especially due to the 1995 Acquisition and the 1996
Acquisition. The following table sets forth certain operating data of Costilla
for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (MBbls).......................................... 158 330 950 86 338
Gas (Mmcf)........................................... 865 1,600 4,806 477 1,643
MBOE................................................. 302 597 1,751 166 612
AVERAGE SALES PRICES (1):
Oil (per Bbl)........................................ $ 16.93 $ 15.25 $ 15.53 $ 17.82 $ 17.32
Gas (per Mcf)........................................ 1.82 1.63 1.45 1.34 1.81
PRODUCTION COST (2):
Per BOE (3).......................................... $ 5.59 $ 3.94 $ 5.91 $ 5.40 $ 5.98
Per dollar of sales.................................. 0.40 0.31 0.48 0.41 0.41
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE.............................................. $ 2.93 $ 3.09 $ 3.48 $ 2.78 $ 3.25
Per dollar of sales.................................. 0.21 0.24 0.28 0.21 0.22
</TABLE>
- ------------------------
(1) Before deduction of production taxes and net of hedging results.
(2) Excludes depreciation, depletion and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if applicable.
27
<PAGE>
(3) Production costs per BOE in 1995 and for the three months ended March 31,
1996 were unusually high as a result of relatively high workover expenses
with respect to properties acquired in the 1995 Acquisition which did not
produce related production improvement until subsequent periods. In
addition, the Company expended approximately $1.6 million during 1995 in one
field in the Permian Basin primarily for plugging wells to comply with
applicable regulatory requirements.
Costilla uses the successful efforts method of accounting for its oil and
gas activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells that result in proved reserves, and to drill
and equip development wells are capitalized. Costs to drill exploratory wells
that do not result in proved reserves, geological, geophysical and seismic
costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted using the unit-of-production method. Unproved oil and
gas properties that are individually significant are periodically reviewed for
impairment of value, and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are amortized based
on the Company's experience of successful drilling and average holding period.
The Company utilizes option contracts to hedge the effect of price changes
on a portion of its future oil and gas production. Premiums paid and amounts
receivable under the option contracts are amortized and accrued to oil and gas
sales, respectively. See "Business and Properties -- Risk Management."
The Company's predecessors were classified as partnerships for federal
income tax purposes. Therefore, no income taxes were paid or provided for by the
Company prior to the Offerings. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
The Company's total oil and gas revenues for the three months ended March
31, 1996 were $8,833,000, representing an increase of $6,656,000 (306%) over
revenues of $2,177,000 for the comparable period in 1995. This increase was
primarily due to the 1995 Acquisition which accounted for approximately
$5,722,000 of the revenue increase.
Oil and gas production was 612 MBOE in the 1996 period compared to 166 MBOE
in the 1995 period. Of the 446 MBOE increase, 380 MBOE was due to the properties
acquired in the 1995 Acquisition. The remainder of the increase was due to a
combination of successful drilling activities and the enhancement of existing
production.
Interest and other revenues were $88,000 for the three months ended March
31, 1996 compared to $3,000 for the comparable period in 1995, representing an
increase of $85,000, which was comprised of an increase in interest income of
$21,000 in 1996 due to increased funds earning interest and $65,000 in oil
marketing income. Also in the 1996 period, the Company realized gains of $30,000
on the sale of various properties for which there were no comparable sales for
the three months ended March 31, 1995.
Oil and gas production costs in the 1996 period were $3,659,000 ($5.98 per
BOE), compared to $896,000 in the 1995 period ($5.40 per BOE), representing an
increase of $2,763,000 (308%), due principally to the 1995 Acquisition. On a per
BOE basis, production costs increased $0.58 due primarily to costs incurred to
exploit the properties acquired in the 1995 Acquisition which did not produce
related production improvement for the full period. In addition, the 1995 period
was negatively affected by operating costs incurred in connection with plugging
and abandoning certain wells on properties acquired in late 1994.
General and administrative expense for the three months ended March 31, 1996
was $1,362,000, representing an increase of $903,000 (197%) from the comparable
period in 1995 of $459,000. The increase is primarily due to an increase in
personnel and related costs necessary to accommodate the increased activities of
the Company due to the 1995 Acquisition and in anticipation of the 1996
Acquisition.
28
<PAGE>
Exploration and abandonment expense decreased to $228,000 in the 1996 period
compared to $1,007,000 in the 1995 period. The Company did not incur seismic
costs for the three months ended March 31, 1996, compared to $467,000 which were
incurred for the comparable period in 1995. Dry hole costs decreased from
$540,000 to $228,000 for the comparable periods in 1995 and 1996, respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$1,986,000 compared to $462,000 for the 1995 period, representing an increase of
$1,524,000 (330%). During 1996, depreciation, depletion and amortization on oil
and gas production was provided at an average rate of $3.25 per BOE compared to
$2.78 per BOE for 1995. The increase was due primarily to the 1995 Acquisition.
Interest expense was $1,704,000 in the 1996 period, compared to $407,000 for
the comparable period in 1995. The $1,297,000 (319%) increase was attributable
to increased levels of debt which the Company used to finance the 1995
Acquisition. The average amounts of applicable interest-bearing debt for the
comparable periods in 1996 and 1995 were $71,923,000 and $19,820,000,
respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's total oil and gas revenues for 1995 were $21,693,000,
representing an increase of $14,056,000 (184%) over revenues of $7,637,000 in
1994. This increase was primarily due to the 1995 Acquisition which accounted
for approximately $12,032,000 of the revenue increase.
Oil and gas production was 1,751 MBOE in 1995 and 597 MBOE in 1994. Of the
1,154 MBOE increase, 1,099 MBOE was due to the properties acquired in the 1995
Acquisition.
Interest and other revenues were $123,000 in 1995 compared to $87,000 in
1994, representing an increase of $36,000 (41%), which was comprised of an
increase in interest income of $59,000 in 1995 due to an increased amount of
funds earning interest, partially offset by a decrease of other income of
$23,000. In 1994, the Company realized a gain of $112,000 on the sale of various
properties for which there were no comparable gains in 1995.
Oil and gas production costs in 1995 were $10,355,000 ($5.91 per BOE),
compared to $2,351,000 in 1994 ($3.94 per BOE), representing an increase of
$8,004,000 (340%). The major portion of the increase was due to increased
production associated with the 1995 Acquisition. In addition, certain acquired
properties required remedial workovers and other activity immediately following
acquisition resulting in unusual operating costs of approximately $600,000
during 1995. In addition, $1,605,000 of operating costs were incurred during
1995 primarily in connection with plugging and abandoning certain wells to
comply with applicable regulatory requirements on properties acquired in late
1994.
General and administrative expense for 1995 was $3,571,000, representing an
increase of $2,387,000 (202%) from 1994 expense of $1,184,000. The increase is
primarily due to an increase in personnel and related costs necessary to
accommodate the increased activities of the Company due to the 1995 Acquisition.
Exploration and abandonment expense increased to $1,650,000 in 1995 compared
to $793,000 in 1994. The increase of $857,000 (108%) was comprised principally
of $790,000 of seismic costs.
Depreciation, depletion and amortization expense for 1995 was $6,095,000
compared to $1,847,000 for 1994, representing an increase of $4,248,000 (230%).
During 1995, depreciation, depletion and amortization on oil and gas production
was provided at an average rate of $3.48 per BOE compared to $3.09 per BOE for
1994. The increase was due primarily to the 1995 Acquisition.
Interest expense was $4,454,000 in 1995 compared to $1,458,000 in 1994. The
$2,996,000 (205%) increase was attributable to increased levels of debt which
the Company used to finance the 1995 Acquisition. The average amounts of
applicable interest-bearing debt in 1995 and 1994 were $49,972,000 and
$17,632,000, respectively.
29
<PAGE>
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 the properties
acquired during 1994.
Interest and other revenues were $87,000 in 1994 compared to $56,000 in
1993. The increase of $31,000 was comprised of an increase in interest income of
$26,000 in 1994, due to increased funds earning interest, and an additional
$5,000 in other income.
Oil and gas production costs in 1994 were $2,351,000 ($3.94 per BOE),
compared to $1,688,000 in 1993 ($5.59 per BOE), representing an increase of
$663,000. The increase in production costs is primarily attributable to two
acquisitions in 1994.
In 1994, general and administrative expense was $1,184,000, representing an
increase of $232,000 (24%) from 1993 expense of $952,000. The increase is due to
an increase in personnel and costs related primarily to acquisitions made in
1994.
Exploration and abandonment expense increased to $793,000 in 1994 compared
to $218,000 in 1993. The increase of $575,000 (264%) was due to an increase in
non-productive wells drilled in 1994 compared to 1993.
Depreciation, depletion and amortization expense for 1994 was $1,847,000
compared to $884,000 for 1993, representing an increase of $963,000 (109%),
primarily due to increased production. During 1994, depreciation, depletion and
amortization expense on oil and gas production was provided at an average rate
of $3.09 per BOE compared to $2.93 per BOE for 1993. The increase was due to
increased drilling and development, and the acquisition of additional
properties.
Interest expense was $1,458,000 in 1994 compared to $605,000 in 1993. The
$853,000 increase was attributable to increased debt levels related primarily to
the Company's acquisition of additional oil and gas properties in 1994. The
average amount of applicable interest-bearing debt in 1994 and 1993 was
$17,632,000 and $8,258,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES
Funding for the Company's business activities has historically been provided
by bank financings, cash flow from operations, private equity sales, property
divestitures and joint ventures with industry participants. The Company
completed a $10 million private equity placement in February 1995. Subsequently,
the 1995 Acquisition and the 1996 Acquisition were substantially funded by bank
financings. The Company plans to finance its continuing operations and execute
its business strategy with cash flow from operations, net proceeds from the
Offerings and borrowings under the Credit Facility.
The Company believes that cash flow from operations and borrowing
availability under the Credit Facility will be sufficient for anticipated
operating and capital expenditure requirements. However, because future cash
flows and the availability of financing are subject to a number of variables
beyond the Company's control, there can be no assurance that the Company's
capital resources will be sufficient to maintain currently planned levels of
capital expenditures.
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.
30
<PAGE>
The Company is in discussion with several banks to provide the Credit
Facility following the closing of the Offerings. The Company anticipates that it
will have approximately $50.0 million available under the Credit Facility, none
of which is expected to be outstanding immediately following the Offerings.
Although certain of the Company's costs and expenses may be affected by
inflation, inflationary costs have not had a significant effect on the Company's
results of operations.
CAPITAL EXPENDITURES
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
The following table sets forth costs incurred by the Company in its
development, exploration and acquisition activities during the periods
indicated. The table does not include the 1996 Acquisition which was consummated
in June 1996 for an approximate purchase price of $42.5 million.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs........................................ $ -- $ -- $ 158 $ 232
Exploration costs........................................ 2,017 2,167 5,627 1,822
Acquisition costs:
Unproved properties.................................... 829 1,232 1,742 677
Proved properties...................................... 4,665 9,649 52,470 2,246
--------- --------- --------- ------
Total................................................ $ 7,511 $ 13,048 $ 59,997 $ 4,977
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The Company anticipates that costs incurred for 1996 will be approximately
$64.8 million, of which approximately $42.5 million was expended for the 1996
Acquisition, and approximately $5.0 million was expended for exploration and
development activities during the three months ended March 31, 1996.
31
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin, the Gulf Coast and the Rocky Mountain
regions. The Company's strategy focuses on increasing reserves through targeted
exploration programs, the exploitation of its existing properties and selective
property acquisitions. In addition, the Company recently acquired an interest in
a concession for the development of mineral interests in the Republic of
Moldova, in Eastern Europe. The Company also has minor interests in the domestic
gas gathering and transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of March 31, 1996, the Company had total
estimated net proved reserves 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 had occurred at March 31, 1996. The Company also
has substantial undeveloped acreage consisting of 205,908 gross (141,384 net)
undeveloped acres. The Company has identified in excess of 200 drilling
locations of which 82 are included in its proved reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities, and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 23 wells based on these
3-D surveys, 20 of which have been productive. The Company has recently
completed a third 3-D survey in Pecos County, Texas and intends to commence
drilling on this acreage in the second half of 1996. Moreover, the Company is
currently conducting two additional 3-D surveys. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and EBITDA. The Company increased its estimated proved reserves from
6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at March 31, 1996 (pro forma for
the 1996 Acquisition), representing a compound annual growth rate of 114%. This
reserve growth has been achieved at an average all-in finding cost of $3.49 per
BOE over such period, a level which the Company believes is lower than industry
averages. Concurrently, the Company increased its average net daily production
from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for the three
months ended March 31, 1996 (pro forma for the 1996 Acquisition), representing a
compound annual growth rate of 195%. EBITDA increased at a 240% compound annual
growth rate from $1.8 million for 1993 to $20.8 million for 1995 (pro forma for
the 1995 Acquisition and the 1996 Acquisition).
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a diverse portfolio of
properties. The Company also seeks to manage the elements of its business
strategy through the operation of a significant portion of its properties, the
use of a disciplined rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- EXPLORATION EFFORTS. The Company uses extensive geological and
geophysical analysis to carefully focus its 3-D seismic surveys. This
focus allows the Company to successfully direct the size and scope of its
exploration program in order to improve the likelihood of success while
managing overall exploration costs. The Company's exploration efforts are
concentrated currently on known producing regions. The Company plans to
drill 26 exploratory wells during the remainder of 1996 and 36 exploratory
wells in 1997. Capital budgeted for exploration activities is $8.4 million
for the last nine months of 1996 and $10.8 million for 1997.
32
<PAGE>
- EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers, infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.9 million
for the last nine months of 1996 and $9.2 million for 1997, which includes
the drilling of 17 development wells in 1996 and 13 development wells in
1997.
- PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying
and developing previously unproved reserves on acquired acreage. The
Company seeks to acquire reserves which will fit its existing portfolio,
are generally not being actively marketed and where a negotiated sale
would be the method of purchase. The Company does not rely on major oil
company divestitures or property auctions.
- PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities
in distinct regions it is able to reduce commodity price and other
operational risks. The Company's Moldovan interest is an extension of this
strategy and can be characterized by low initial costs, significant
reserve potential and the availability of technical data that may be
further developed by the Company.
- CONTROL OF OPERATIONS. The Company prefers to operate and own the
majority working interest in its properties. This allows the Company
greater control over future development, drilling, completing and lifting
costs and marketing of production. At December 31, 1995, the Company
operated wells constituting approximately 65% of its total PV-10 Value
(pro forma for the 1996 Acquisition).
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 6.9 Mmbbls of oil and 40.0 Bcf of gas, aggregating
13.6 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At March 31, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at March 31, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 42,855 gross
(10,172 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
33
<PAGE>
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of March 31, 1996
(pro forma for the 1996 Acquisition), which relates to the principal oil and gas
properties owned by the Company.
<TABLE>
<CAPTION>
PROVED RESERVES
-------------------------------------------------------------
TOTAL OIL PERCENT OF
GROSS OIL GAS EQUIVALENT TOTAL OIL
AREA WELLS (MBBLS) (MMCF) (MBOE) EQUIVALENT
- ------------------------------------------------------------ --------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Permian Basin............................................... 1,890 9,200 55,200 18,400 52.1%
Gulf Coast.................................................. 968 2,054 38,440 8,461 24.0
Rocky Mountain.............................................. 236 4,526 12,886 6,674 18.9
Other....................................................... 428 696 6,394 1,762 5.0
--------- ----------- --------- ----------- -----
Total....................................................... 3,522 16,476 112,920 35,297 100.0%
--------- ----------- --------- ----------- -----
--------- ----------- --------- ----------- -----
</TABLE>
PERMIAN BASIN. At March 31, 1996, 52.1% of the Company's proved reserves
were concentrated in the Permian Basin, an approximately 70-county region in
West Texas and Southeast New Mexico. The Company's production comes from well
known fields such as the Spraberry Trend, Sawyer Canyon, Goldsmith Unit and
Susan Peak. The majority of the Company's producing intervals in the Permian
Basin range from 4,500 feet to 9,500 feet in depth.
The Company has several exploratory projects in the Permian Basin based
primarily on 3-D seismic surveys. The most significant include:
EDWARDS/MCELROY RANCH PROSPECT, ECTOR AND CRANE COUNTIES, TEXAS. Costilla
has identified 75 drilling locations on the Company's 9,849 gross (4,334 net)
acres in this prospect based on 3-D seismic data. The Company successfully
completed the Edwards 14-1 well in the Strawn formation in May 1996, which
initially flowed at a rate of 360 Bbls of oil per day and 258 Mcf of gas per
day. At June 30, 1996, the well was flowing at a rate of 150 Bbls of oil and 85
Mcf of gas per day. Six miles south of the Edwards 14-1 well, Costilla has
drilled the University 30-1 well, which has confirmed the Strawn and Wolfcamp
trends defined by the Company's extensive approximate 50-square mile 3-D seismic
project undertaken jointly with Texaco Exploration and Producing, Inc.
("Texaco"). This well is currently being completed. Two additional wells are
being drilled on seismic delineated features similar to the initial Edwards
discovery. The Company plans to drill 25 wells in this trend through 1997. The
Company's working interest in this prospect is approximately 44%.
Costilla and Texaco are also developing a Queen Sand field identified from
the Edwards/McElroy Ranch seismic program. The four wells drilled through June
30, 1996 are producing an aggregate of approximately 80 Bbls of oil per day and
the Company is in the process of completing two additional wells. Drilling of
six wells is anticipated through 1997, with the field ultimately being developed
on a planned waterflood pattern in order to maximize recovery of the oil in
place.
MCGYVER-GREEN ACRES PROSPECT, HOWARD COUNTY, TEXAS. The Company has
identified 41 drilling locations in this prospect based on information derived
from approximately 30 square miles of 3-D seismic data that the Company acquired
on the area in 1994. The Talbot Fuller well was the first well drilled by the
Company on this prospect and was completed in the Canyon Lime formation at 8,200
feet in August 1994. Since completion, the well has produced 62,000 Bbls of oil
and 207 Mmcf of gas, and averaged 77 Bbls of oil per day and 320 Mcf of gas per
day during June 1996. Subsequent to the first well, 11 additional wells have
been drilled on this prospect of which ten are productive. The Company intends
to drill eight additional wells during the balance of 1996 on its 9,148 gross
(6,587 net) acres. The Company's working interest in this prospect averages
approximately 72%.
The following two 3-D programs currently being undertaken by the Company in
the Permian Basin are expected to provide additional drilling locations:
WILSON RANCH 3-D PROJECT, PECOS COUNTY, TEXAS. The Wilson Ranch is located
in northeastern Pecos County, approximately 10 miles west of the Yates field.
The Company recently completed an approximate
34
<PAGE>
17-square mile seismic survey on the project. A second phase will be initiated
in the first quarter of 1997. The project presents several potential exploration
targets, including the Queen, San Andres, Wolfcamp, Devonian and Ellenberger
formations, found at depths ranging from 1,600 to 8,000 feet. The Company has
agreed to lease 3,750 gross acres on this 50,000 acre ranch. Upon acquiring the
lease, the Company intends to sell one-half of its approximate 75% working
interest to a major oil company. The Company believes that there is significant
additional potential in this area.
DAVAN UNIT 3-D PROJECT, STONEWALL COUNTY, TEXAS. The Company has another
3-D seismic project under way with Texaco to further develop the
Company-operated Davan Unit. The project involves a 3-D seismic evaluation of
approximately 3,200 gross acres adjacent to a Company-operated waterflood which
has produced in excess of three Mmbbls of oil.
Two examples of the Company's current exploitation efforts in the Permian
Basin include:
EAST GOLDSMITH FIELD QUEEN DISCOVERY AND C02 PROJECT, ECTOR COUNTY,
TEXAS. The Company owns 3,053 gross (2,073 net) acres in this field located 20
miles northwest of Midland, Texas. Since its discovery, the field has produced
in excess of 17 Mmbbls of oil from seven formations. The most productive zones
in the East Goldsmith Field have been the San Andres and Holt formations, both
of which have been subject to secondary recovery by waterflooding. The Company
has been analyzing a tertiary recovery project in those formations using CO2,
and intends to initiate the project in the fourth quarter of 1996. The Company's
working interest in this project averages approximately 87%.
SUSAN PEAK FIELD WORKOVER AND HORIZONTAL DRILLING PROGRAM, TOM GREEN COUNTY,
TEXAS. The Company recently completed the first horizontal well in this field
located south of San Angelo, Texas, in which it owns a 100% working interest
until payout. Production from this well drilled in the Strawn formation was 110
Bbls of oil per day and 240 Mcf of gas per day on June 30, 1996. Since February
1996, with only two workovers and the new horizontal well, the Company has
increased Susan Peak production from approximately 30 Bbls of oil per day and
700 Mcf of gas per day to a current rate of approximately 200 Bbls of oil per
day and 2,000 Mcf of gas per day. Two possible horizontal drilling locations and
additional workover candidates remain on this 7,461 gross (3,730 net) acre
lease. The Company's working interest in this project ranges from 50% to 100%.
GULF COAST. At March 31, 1996, 24.0% of the Company's proved reserves were
concentrated in the Gulf Coast region. The Company's production in this region
primarily comes from known formations such as Frio, Yegua, Austin Chalk and
Wilcox.
The Company plans to use its expertise in aggressively developing 3-D
opportunities on the extensive acreage position it holds in the region. Examples
of such exploration projects in progress include:
SEALY PROSPECT, AUSTIN COUNTY, TEXAS. The Sealy Field, consisting of 3,534
gross (1,767 net) acres, was acquired in the 1995 Acquisition. The Wilcox
formation in this field has produced over 66 Bcf of gas and there are subsurface
indications of the presence of several fault blocks that lie untested. The
Company's working interest in this prospect is 100%.
SOUTHWEST SPEAKS, LAVACA COUNTY, TEXAS. This project, consisting of 5,078
gross (2,539 net) acres, was also acquired in the 1995 Acquisition and is held
by several shallow Company-operated wells. Multiple producing horizons from
shallow depths to below 14,000 feet have produced over 199 Bcf of gas from this
highly faulted field. A recent well was completed in the Rainbow Wilcox sand on
acreage adjoining Costilla's lease. A well, in which Costilla holds a 5%
interest as a result of a farmout, has also been completed on Costilla's lease.
The Company's plans include a 3-D survey in the Speaks area. The Company's
working interest in this prospect is approximately 50%.
BORCHERS FIELD, LAVACA COUNTY, TEXAS. This field was acquired by the
Company in the 1996 Acquisition. The property is on trend with the Speaks
project and is also a highly faulted field providing opportunity for further
development. The Borchers field has produced a total of 17.5 Bcf of gas from two
Wilcox sands. Costilla has a 100% working interest in this field consisting of
1,321 gross and net acres.
35
<PAGE>
Examples of exploitation activities in this region include:
JOSEY RANCH LEASE, HARRIS COUNTY, TEXAS. Two examples of the Company's
production enhancement of Gulf Coast properties were undertaken on this
prospect. When the lease was acquired in the 1995 Acquisition, production had
nearly ceased. Through a series of workovers, the Company has improved daily
production, as of June 30, 1996, to 63 Bbls of oil per day and 73 Mcf of gas per
day. In addition, Costilla has participated in a 13,000 foot test well on the
Josey Ranch lease to test the Wilcox formation. The well was completed in April
1996 and has consistently produced in excess of 1,000 Mcf of gas per day. The
Josey Ranch lease covers 1,661 gross (649 net) acres, and the Company's working
interest in this prospect is approximately 39%.
PERSONVILLE, LIMESTONE COUNTY, TEXAS. The Company has recently completed an
11,200 foot Cotton Valley well, with initial production rates of 1.1 Mmcf of gas
per day prior to stimulation. Costilla leases 412 gross (111 net) acres in this
prospect, and has identified two additional drilling locations. The Company is
the operator of this prospect and its working interest is approximately 30%.
AUSTIN CHALK, BRAZOS, BURLESON, FAYETTE AND LEE COUNTIES, TEXAS. Costilla
acquired the majority of the working interest in nine gross Austin Chalk wells
in the 1995 Acquisition and an additional 80 gross Austin Chalk wells were
included in the 1996 Acquisition. The Company intends to enhance production on
certain of these wells through stimulation and workover activities, and analyze
further development potential. Costilla has 30,414 gross (20,985 net) acres in
the Austin Chalk area, and its working interest in this area averages
approximately 69%.
ROCKY MOUNTAIN. At March 31, 1996, 18.9% of the Company's proved reserves
were concentrated in the Rocky Mountain region, which includes Montana, North
Dakota, Wyoming, Colorado and Utah.
RAYMOND FIELD, SHERIDAN COUNTY, MONTANA. Since its discovery in 1972, the
Raymond Field has produced over five Mmbbls of oil from five different
formations. Daily production from the field has increased from 180 Bbls of oil
per day since its acquisition in June 1995 to 369 Bbls of oil per day at June
30, 1996 primarily as a result of the Company's improved operations. The Company
plans a 3-D program on its 960 gross and net acres in this field. The Company
owns a 100% working interest in this prospect.
OUTLOOK FIELD, SHERIDAN COUNTY, MONTANA. The Company undertook its first
Rocky Mountain 3-D seismic survey in the Outlook area to further develop the
field. Three drilling locations were identified from the data. The Company
anticipates commencing an Outlook test well in September 1996 that will be
drilled to 10,500 feet, a depth sufficient to test several different formations.
Costilla leases 5,168 gross (1,292 net) acres in the Outlook prospect, and owns
an approximate 25% working interest in this prospect.
NATURAL BUTTES FIELD, UINTAH COUNTY, UTAH. The Company owns a 100% working
interest in 1,280 gross and net acres in this prospect. Development by prior
owners was on 640-acre spacing while offset acreage has been developed on
80-acre spacing. Low gas prices in the area have precluded the assignment of
proved resources to any undeveloped acres. As gas prices improve, the Company
plans to drill additional wells on the prospect.
The Company owns an interest in significant acreage positions in the Rocky
Mountain region which are operated by third parties and are the subject of
active exploitation efforts. The most significant property is:
CIRCLE RIDGE FIELD, FREMONT COUNTY, WYOMING. The Circle Ridge Field, in
which the Company has an approximate 18% working interest, is operated by
Marathon Oil Company. This field is an approximate 1,100 acre waterflood located
in the Wind River Basin of Wyoming, approximately 30 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
36
<PAGE>
of oil per day in January 1995 to a rate of 1,876 Bbls of oil per day for May
1996. The operator has several other projects scheduled for the remainder of
1996 and is evaluating various different methods of enhanced oil recovery for
the field.
MARKETING ARRANGEMENTS
The Company utilizes an active marketing program for a portion of its crude
oil production in order to enhance the net price it receives. The Company sells
its crude oil production from operated properties in North Dakota, Montana and
Wyoming, at the lease level to an oil transportation company for the posted
price, plus an agreed upon bonus, with a corresponding agreement to repurchase
this production at its delivery point (typically, Cushing, Oklahoma) for a price
equal to the then posted price for West Texas Intermediate crude oil less an
agreed upon deduction for transportation and quality differentials, if any,
between the repurchased crude oil and West Texas Intermediate crude oil. The
Company then employs a broker to resell its crude oil to end users (such as
refineries) on a month-to-month basis. The lease level sales and repurchase
contracts are typically of six months duration. With respect to its other
operated oil production (primarily located in Texas), the Company employs a
similar price enhancement strategy, although the repurchase feature is absent.
Instead, the lease level purchaser resells the crude oil to end users at the
delivery point for the account of the Company. The Company markets its gas
production at the lease level pursuant to month-to-month contracts. No single
purchaser of oil or gas accounted for in excess of 10% of the Company's
consolidated revenues for the year ended December 31, 1995.
RISK MANAGEMENT
The Company typically employs a strategy of purchasing put options on a
portion of its anticipated oil and gas production. This strategy is designed to
protect the Company from significant downward movements in commodity prices
while preserving the benefit of rising prices. The Company does not establish
hedges in excess of its anticipated production. Upon consummation of the
Offerings, substantially all of the Company's debt will be fixed rate. The
Company's current position with regard to its commodity hedges is as follows:
OIL SALES. The Company has purchased "put options" to provide a "floor
price" for 3,000 Bbls of oil per day of its oil production for August 1996
through December 1996. These put options currently in place represent
approximately 57% of the Company's estimated oil production for August 1996
through December 1996. The floor price the Company has an agreement to receive
is $18.00 per Bbl, irrespective of the prices actually paid by purchasers of the
oil at the lease level.
GAS SALES. The Company has purchased "put options" which provide a "floor
price" for 900,000 Mmbtu's per month of its gas production through October 1996.
The put options currently in place represent approximately 68% of the Company's
estimated gas production for July 1996 through October 1996. The floor prices
with respect to such put options varies from $1.65 to $1.75 per Mmbtu depending
on the area in which the gas is produced.
OIL AND GAS RESERVES
The Company's estimated total proved and proved developed reserves of oil
and gas as of December 31, 1993, 1994 and 1995, and as of March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------- PRO FORMA
MARCH 31,
1993 1994 1995 1996 (1)
---------------------- ---------------------- ---------------------- ----------------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed producing....... 1,785 13,268 2,632 15,757 8,338 50,542 13,122 76,439
Proved developed non-producing... 0 0 0 583 228 6,851 429 7,930
Proved undeveloped............... 580 8,351 1,377 11,172 2,222 20,759 2,925 28,551
----- --------- ----------- --------- ----------- --------- ----------- ---------
Total proved................... 2,365 21,619 4,009 27,512 10,788 78,152 16,476 112,920
----- --------- ----------- --------- ----------- --------- ----------- ---------
----- --------- ----------- --------- ----------- --------- ----------- ---------
</TABLE>
- ------------------------
(1) Assumes that the 1996 Acquisition had been consummated at March 31, 1996.
37
<PAGE>
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------------- MARCH 31,
1993 1994 1995 1996 (1)
--------- --------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future net cash flows before income taxes.......................... $ 47,213 $ 68,596 $ 188,337 $ 297,002
Future net cash flows before income taxes, discounted at 10%....... $ 26,377 $ 36,779 $ 113,296 $ 179,527
</TABLE>
- ------------------------
(1) Assumes that the 1996 Acquisition had been consummated at March 31, 1996.
The reserve estimates reflected above for 1993, 1994 and 1995 were prepared
by the Company. The Company's 1995 estimates of gross reserves with respect to
certain of the Company's producing properties were subject to a limited review
by Williamson. The pro forma estimates for March 31, 1996, including the
properties acquired in the 1996 Acquisition, were prepared by Williamson and are
part of reports on the Company's oil and gas properties prepared by Williamson,
a summary of which is set forth herein as Appendix A.
The reserve data set forth herein present estimates only. In general,
estimates of economically recoverable oil and gas reserves and of the future net
revenues therefrom are based upon an number of variable factors and assumptions,
such as historical production from the subject properties, the assumed effects
of regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company therefore emphasizes that the actual production, revenues, severance
and excise taxes, development and operating expenditures with respect to its
reserves will likely vary from such estimates, and such variances could be
material.
Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
In accordance with applicable requirements of the Securities and Exchange
Commission (the "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.
38
<PAGE>
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated. At March 31, 1996, the Company was
in the process of drilling one gross (0.50 net) well and was in the process of
completing three gross (1.32 net) wells as producers which are not reflected in
the following table.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- ----------------------
GROSS NET GROSS NET GROSS NET
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive......................................... 3 0.83 9 2.27 10 4.58
Dry................................................ 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total............................................ 5 1.89 19 6.00 16 7.15
--- --- --- --- --- ---
--- --- --- --- --- ---
Development:
Productive......................................... -- -- -- -- 1 0.44
Dry................................................ -- -- -- -- -- --
--- --- --- --- --- ---
Total............................................ -- -- -- -- 1 0.44
--- --- --- --- --- ---
--- --- --- --- --- ---
Total:
Productive......................................... 3 0.83 9 2.27 11 5.02
Dry................................................ 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total............................................ 5 1.89 19 6.00 17 7.59
--- --- --- --- --- ---
--- --- --- --- --- ---
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
----------------------
GROSS NET
----------- ---------
<S> <C> <C>
Exploratory:
Productive......................................... 3 2.02
Dry................................................ 1 0.72
--- ---
Total............................................ 4 2.74
--- ---
--- ---
Development:
Productive......................................... 4 1.98
Dry................................................ -- --
--- ---
Total............................................ 4 1.98
--- ---
--- ---
Total:
Productive......................................... 7 4.00
Dry................................................ 1 0.72
--- ---
Total............................................ 8 4.72
--- ---
--- ---
</TABLE>
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors under standard drilling
contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are producing
wells and wells capable of production.
<TABLE>
<CAPTION>
ACTUAL (1)
--------------------
GROSS NET
--------- ---------
<S> <C> <C>
Oil wells....................................................................................... 2,245 678.54
Gas wells....................................................................................... 1,277 231.11
--------- ---------
Total....................................................................................... 3,522 909.65
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Does not include royalty and overriding royalty interests owned by Statewide
or the Company. See "-- Other Activities -- Minerals Acquisition Program."
In addition, one well with multiple completions is counted as a single well.
ACREAGE
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of March 31, 1996. Acreage in
which the Company's interest is limited to royalty, overriding royalty, mineral
and similar interests (such as all acreage owned by Statewide) is excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL (1)
-------------------- -------------------- --------------------
GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin..................................... 27,049 23,489 52,903 42,250 79,951 65,742
Gulf Coast........................................ 34,324 29,746 28,457 19,958 62,781 49,703
Rocky Mountain.................................... 8,967 8,676 47,510 40,799 56,477 49,453
Other............................................. 13,439 12,492 34,183 28,225 47,623 40,717
--------- --------- --------- --------- --------- ---------
Total......................................... 83,779 74,403 163,053 131,212 246,832 205,615
</TABLE>
39
<PAGE>
- ------------------------
(1) In the 1996 Acquisition, the Company acquired an additional 292,146 gross
(73,528 net) developed acres and 42,855 gross (10,172 net) undeveloped
acres.
OTHER ACTIVITIES
MOLDOVA CONCESSION AGREEMENT. In July 1995, the Republic of Moldova
(located in Eastern Europe between Romania and the Ukraine) granted a Concession
Agreement to Resource Development Company Limited, L.L.C. ("Redeco"), an entity
not affiliated with the Company. The Company has paid Redeco $90,000 and agreed
to bear the first $2.0 million of Concession expenses ($882,000 of which had
been expended through March 31, 1996) in return for a 50.0% interest in the
Concession. After the initial $2.0 million expenditure, Redeco and the Company
are responsible for bearing 50.0% each of future expenses. The Company will
serve as operator with respect to all activities undertaken pursuant to the
Concession. The Concession Agreement covers the entire country with respect to
oil and gas and other minerals and continues for various time periods depending
on the nature of the activity conducted. In connection with two previously
producing but now abandoned fields, the Company's exclusive rights continue for
20 years. The Company's exclusive period to explore throughout the remainder of
Moldova expires in 2005, but the Company will maintain exclusive development
rights with respect to fields discovered for a period of 20 years from the date
of first production from such field. The Company has no fixed financial
commitments with respect to the Concession.
MINERALS ACQUISITION PROGRAM. Statewide, a Company subsidiary, was
organized for the purpose of acquiring overriding royalty interests and other
types of non cost-bearing mineral interests underlying producing oil and gas
fields primarily in Texas. The strategy of such acquisitions is to make blanket
offers to holders of small interests. From inception through March 31, 1996,
Statewide expended approximately $2.9 million in acquiring interests in
approximately 1,400 properties. Through March 31, 1996, Statewide had received
revenues from such interests aggregating approximately $1.2 million, as well as
proceeds from sales of such interests of approximately $150,000.
GAS GATHERING AND TRANSMISSION. In 1996, the Company purchased a 45.0%
membership interest (which reduces to 32.4% when the Company and certain other
members recoup their original investment) in Republic Gas Partners, L.L.C., a
Texas limited liability company ("Republic"), for approximately $800,000.
Republic owns all of the stock of Mid Louisiana Gas Company, Mid Louisiana
Marketing Company and Mid Louisiana Gas Transmission Company (collectively, the
"Midla Companies"). The assets of the Midla Companies include 409 miles of
mainly 22 inch pipeline extending from the Monroe field area south of the city
of Baton Rouge serving various Louisiana and Mississippi municipal and
industrial customers along its route. Mid Louisiana Gas Company's pipeline is
subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC").
Valley, a Company subsidiary, owns a small gas gathering system, several
small gas plants, 11 salt water disposal wells located in each of its three
principal regions and compressors used in the compression of gas located in the
Gulf Coast region. For the year ended December 31, 1995, Valley had revenues of
$553,000 and net income of $264,000, substantially all of which were related to
transactions with Costilla.
In the 1996 Acquisition, Pipeline, a Company subsidiary, acquired a 120 mile
gas transportation pipeline in southwestern Pennsylvania for an allocated value
of $3.5 million. The Company regards this asset as non-strategic to its business
activities and is presently marketing the pipeline for sale.
COMPETITION AND MARKETS
Competition in all areas of the Company's operations is intense. Major and
independent oil and gas companies and oil and gas syndicates actively bid for
desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. A number of the Company's
competitors have financial resources and acquisition, exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies. Many of the Company's competitors have been engaged in the energy
business for a much longer time than the Company. Such companies may be able to
pay more for productive oil and gas
40
<PAGE>
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.
The 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, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance the
Company's ability to market and transport its gas, although it may also subject
the Company to greater competition and the more restrictive pipeline imbalance
tolerances and greater associated penalties for violation of such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which, generally,
would index such rates to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting oil and
natural gas liquids by pipeline, although the most recent adjustment generally
decreased rates. These regulations are subject to pending petitions for judicial
review. The Company is not able to predict with certainty what effect, if any,
these regulations will have on it, but, other factors being equal, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil and natural gas liquids.
41
<PAGE>
ENVIRONMENTAL MATTERS
Operations of the Company are subject to numerous and constantly changing
federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of certain
permits, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment in connection with drilling
and production, restrict or prohibit drilling activities that could impact
wetlands, endangered or threatened species or other protected natural resources
and impose substantial liabilities for pollution resulting from the Company's
operations. Such laws and regulations may substantially increase the cost of
exploring for, developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the cost of compliance with such laws
and regulations has not been material and is not expected to be material during
the next fiscal year. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
For instance, legislation has been proposed in Congress from time to time that
would reclassify certain oil and gas production wastes as "hazardous wastes,"
which reclassification would make exploration and production wastes subject to
much more stringent handling, disposal and clean-up requirements. State
initiatives to further regulate the disposal of oil and gas wastes and naturally
occurring radioactive materials are also pending in certain states, including
Texas, and these various initiatives could have a similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
found at the site and persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
person injury and property damage allegedly caused by the hazardous substances
released into the environment. The Company is able to control directly the
operation of only those wells with respect to which its acts as operator.
Notwithstanding the Company's lack of control over wells operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, be attributed to the Company. The Company has no
material commitments for capital expenditures to comply with existing
environmental requirements.
EMPLOYEES
At June 30, 1996, the Company had 109 full-time employees. None of the
Company's employees is subject to a collective bargaining agreement. The Company
considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is a defendant or codefendant in minor lawsuits that have arisen
in the ordinary course of business. While the outcome of the these lawsuits
cannot be predicted with certainty, management does not expect any of these to
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
TITLE TO PROPERTIES
The Company has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring undeveloped properties. A title
opinion is obtained prior to the commencement of drilling
42
<PAGE>
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 Certain Indebtedness."
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the hazards and risks inherent in
drilling and production and transportation of oil and gas, including fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury or loss of life,
severe damage to and destruction of properties of the Company and others, and
suspension of operations. See "Risk Factors -- Drilling Risks" and "Risk Factors
- -- Operating Hazards and Uninsured Risks."
The Company maintains insurance of various types to cover its operations.
The limits provided under its liability policies total $6 million. In addition,
the Company maintains operator's extra expense coverage which provides for care,
custody and control of all material wells drilled by the Company as operator.
The Company believes that its insurance is adequate and customary for companies
of a similar size engaged in operations similar to those of the Company, but
losses could occur for uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The Company's general policy is to only engage
drilling contractors who provide substantial insurance coverage and name the
Company as an additional named insured. The occurrence of a significant adverse
event, the risks of which are not fully covered by insurance, could have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, no assurances can be given that the Company will be able
to maintain adequate insurance in the future at rates it considers reasonable.
43
<PAGE>
MANAGEMENT
The executive officers and directors of the Company following completion of
the Corporate Reorganization are listed below, together with a description of
their experience and certain other information (ages provided are as of June 30,
1996). Each of the directors serve for a one year term. Executive officers are
appointed by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE EMPLOYED SINCE POSITION WITH COMPANY
- -------------------------- --- ----------------- ---------------------------------------------------------------
<S> <C> <C> <C>
Cadell S. Liedtke 41 1988 Chairman of the Board, Chief Executive Officer and Director
Michael J. Grella 47 1988 President, Chief Operating Officer and Director
Henry G. Musselman 42 1992 Executive Vice President and Director
Jerry J. Langdon 43 n/a Director
W.D. Kennedy 76 n/a Director
Bobby W. Page 53 1996 Senior Vice President, Treasurer and Chief Financial Officer
Clifford N. Hair, Jr. 49 1992 Vice President -- Land and Secretary
Roger J. Wetz 47 1992 Vice President -- Exploration (Geology)
Roger A. Freidline 46 1993 Vice President -- Exploration (Geophysics)
Brian K. Miller 36 1992 Vice President -- Reservoir Engineering
Sal J. Pagano 45 1995 Vice President -- Engineering and Operations
Keith Atwood 42 1992 Vice President -- Field Operations
Celia A. Zinn 48 1996 Controller
</TABLE>
Cadell S. Liedtke entered the oil and gas business in Midland, Texas in 1977
as an independent landman generating oil and gas prospects in the Permian Basin.
He founded the Company's predecessor with Michael J. Grella in 1988 and has
served as managing partner and/or chief executive officer since that time. Mr.
Liedtke has served on the Board of Directors of Texas Commerce Bank-Permian
Basin and has been appointed by Texas Governor George W. Bush to the Oil and Gas
Compact Commission. Mr. Liedtke is a member of the All-American Wildcatters
Association, the Permian Basin Petroleum Association, the Permian Basin
Landman's Association and the Independent Producer's Association of America. Mr.
Liedtke graduated from the University of Texas at Austin in 1977 with a B.A.
degree in economics.
Michael J. Grella has served as Chief Operating Officer of the Company and
its predecessor entities since their formation in 1988. He owned and operated an
independent oil and gas company and has invested in the oil and gas business
since 1982. Mr. Grella is a member of the Permian Basin Petroleum Association
and the Independent Producer's Association of America. Mr. Grella has a B.S.
degree in computer science from the University of California.
Henry G. Musselman began his oil and gas career in 1975 with Musselman
Petroleum and Land Company where he served as Vice President and a Director
until forming Musselman, Owen & King in 1982. For the 10 years until merging his
company into Costilla's predecessor in 1992, Mr. Musselman developed and
acquired oil and gas properties throughout the Permian Basin. Mr. Musselman is a
member and prior director of the Independent Producer's Association of America.
Mr. Musselman graduated from the University of Texas at Austin in 1975 with a
B.B.A. degree.
Jerry J. Langdon has previously held positions with WP Corporation, Houston
Pipeline Company, Texas Oil & Gas Corporation and W. Wilson Corporation. In
1980, Mr. Langdon formed Texas IntraMark Gas Company, Inc., an intrastate gas
gathering company engaging in the business of constructing and operating natural
gas gathering, treating and processing facilities. In 1984, Mr. Langdon formed
Langdon & Associates, a natural gas consulting group advising petroleum
resource-oriented companies, financial institutions and law firms on a variety
of technical, commercial and regulatory 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
44
<PAGE>
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 and a member of the American Association
of Petroleum Landmen and the Petroleum Basin Landman's Association. Mr. Hair
graduated with honors from the University of Houston in 1971 with a B.B.A.
degree in accounting.
Roger J. Wetz began his oil and gas career with IMCO Services, a division of
Halliburton, Inc. in 1974. He held a variety of geological positions with Gulf
Energy & Minerals Company, TXO Production Corporation and Terra Resources, Inc.
from 1976 to 1989. From 1989 until joining the Company in 1992, Mr. Wetz was an
independent geologist generating prospects in the Permian Basin. Mr. Wetz
graduated from St. Mary's University in 1973 with a B.S. degree in geology.
Roger A. Freidline began his industry career with Union Oil Company of
California. From 1976 until 1985, Mr. Freidline served in various geophysical
capacities with Forest Oil Corporation, Gifford, Mitchell and Wisenbaker and
Heritage Resources, Inc. Mr. Freidline was an independent geophysicist from 1985
until joining the Company, except for a period of employment as district
geologist for Hondo Oil & Gas Company prior to its sale. Mr. Freidline is a
Certified Petroleum Geologist, and a member of the Society of Exploration
Geophysicists, the Permian Basin Geophysical Society and the West Texas
Geological Society. He has co-authored papers which have appeared in Geology and
The Bulletin of the Seismological Society of America. Mr. Freidline received a
B.S. degree with highest honors from the New Mexico Institute of Mining and
Technology in 1972 and a Masters of Science degree in geophysics from the
University of Utah in 1974.
Brian K. Miller entered the oil and gas business as an operations engineer
for ARCO Oil and Gas Company. From 1984 to 1987, he was a reservoir engineer
with First City National Bank of Midland, Texas, and from 1987 to 1989, Mr.
Miller was an independent consulting engineer. Prior to joining the Company in
1992, Mr. Miller served as an oil and gas analyst under appointment to the
Federal Deposit Insurance Corporation. Mr. Miller is a member of the Society of
Petroleum Engineers. Mr. Miller received a B.S. degree with highest honors in
petroleum engineering from the University of Texas at Austin in 1982 and a
Master of Business Administration degree with honors in finance in 1984.
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,
45
<PAGE>
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.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and addresses of each of the
Company's stockholders who beneficially own more than five percent of the
Company's Common Stock, the number of shares beneficially owned by such
shareholders and the percentage of the Common Stock so owned at June 30, 1996,
assuming in each case the Corporate Reorganization had been consummated at June
30, 1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) CLASS
- ------------------------------------ ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke .................. 2,656,796 26.6%
400 W. Illinois
Midland, Texas 79701
Michael J. Grella .................. 1,558,161 15.6%
400 W. Illinois
Midland, Texas 79705
NationsBanc Capital Corp. .......... 1,080,008 10.8%
100 North Tryon Street
Charlotte, North Carolina 28255
Henry G. Musselman ................. 705,035 7.0%
400 W. Illinois
Midland, Texas 79701
</TABLE>
- ------------------------
(1) Unless otherwise indicated, all persons own the listed shares of record.
The table appearing below sets forth information as of June 30, 1996
(assuming the Corporate Reorganization had been consummated on such date) with
respect to the shares of Common Stock beneficially owned by each of the
Company's Directors, the Chief Executive Officer and the three other most highly
compensated executive officers for 1996 (whose annualized compensation for such
year based on compensation levels following the Offering is expected to exceed
$100,000) and all Directors and executive officers as a group, and the percent
of the outstanding Common Stock owned by each.
<TABLE>
<CAPTION>
DIRECTORS AND NAMED AMOUNT AND NATURE OF PERCENT OF
EXECUTIVE OFFICER BENEFICIAL OWNERSHIP CLASS (1)
- ------------------------------------ ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke................... 2,656,796 26.6%
Michael J. Grella................... 1,558,161 15.6%
Henry G. Musselman.................. 705,035 7.0%
Bobby W. Page....................... 75,000(2) 0.7%
All Officers and Directors as a
group (13 persons).................. 4,994,992(2) 49.6%
</TABLE>
- ------------------------
(1) For the sole purpose of calculating these percentages, the shares, which the
named person has the right to acquire within 60 days, by exercise of the
options described in these footnotes, are deemed outstanding shares with
respect to that person's percentage ownership and with respect to the
percentage ownership of all Officers and Directors as a group.
(2) Includes 75,000 shares issuable pursuant to options under the Company's 1996
Stock Option Plan which options will be immediately exercisable upon closing
of the Offerings at a price equal to the initial public offering price of
the Common Stock.
47
<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 Chief 1995 185,700 -- -- -- --
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 Financial 1995(1) -- -- -- -- --
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 will be
granted for a 10-year term.
DIRECTORS' COMPENSATION
Compensation for non-employee directors (Messrs. Langdon and Kennedy) will
consist of an annual retainer fee of $10,000, plus a $1,000 fee for each Board
meeting attended and a $1,000 fee for attending a committee meeting held on a
day other than the same day of a Board meeting. In addition, outside Directors
are participants in the Company's Outside Directors Stock Option Plan described
under "-- Benefit Plans -- Outside Directors Stock Option Plan." Employee
Directors do not receive compensation for serving on the Board or the Board's
committees.
EMPLOYMENT AGREEMENTS
Messrs. Liedtke, Grella and Musselman have entered into employment
agreements (the "Founders Employment Agreements") with the Company which will
become effective upon the closing of the Offerings and replace certain existing
agreements. The Founders Employment Agreements are each for three years,
commencing on the closing of the Offerings and each will automatically renew for
successive one-year periods thereafter unless the employee is notified to the
contrary thereafter. The Founders Employment Agreements provide for salary
levels for Messrs. Liedtke, Grella and Musselman of $300,000, $300,000 and
$215,000, respectively.
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<PAGE>
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.
However, if such person were to voluntarily leave his employment with the
Company, no further payments would be required. Each Founders Employment
Agreement provides that the covered employee will not compete with the Company
for a one year period following his voluntary cessation of employment or
termination of employment for cause. Competitive activities are defined as
engaging in the oil and gas business in any area in which the Company is then
active.
Bobby W. Page has entered into an employment agreement (the "Page Employment
Agreement") with the Company effective June 30, 1996. The Page Employment
Agreement is for a period of three years from June 30, 1996 and will
automatically renew for successive one-year periods thereafter unless Mr. Page
is notified to the contrary by the Company. The Page Employment Agreement
provides a $25,000 bonus (which includes Mr. Page's cost of relocation), plus a
base salary of $150,000 until January 1, 1997; $175,000 until January 1, 1998;
and $185,000 thereafter. In addition, Mr. Page will receive options to purchase
75,000 shares of Common Stock, certain insurance benefits and other benefits
generally available to the Company's employees. Mr. Page would receive his
salary for the remaining term of the Page Employment Agreement if the Company
were to terminate the Page Employment Agreement other than for cause. However,
if Mr. Page were to voluntarily leave his employment with the Company, no
further payments would be required.
BENEFIT PLANS
OUTSIDE DIRECTORS STOCK OPTION PLAN. The Outside Directors Stock Option
Plan provides for the issuance of stock options to the outside directors of the
Company. A total of shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustments to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends and
similar events. Only outside directors are eligible to participate in the plan.
Outside directors are those directors of the Company who are not executive
officers or regular salaried employees of the Company as of the date an option
is granted. Under the plan, an option for shares of Common Stock will be
granted to each person who qualifies as an outside director as of the effective
date of the plan and each year thereafter that such person is elected as a
director of the Company. The exercise price of each option granted under the
plan will be the fair market value (as reported on the Nasdaq National Market)
of the Common Stock at the time the option is granted, and may be paid either in
cash or shares of Common Stock. Each option will be exercisable immediately, and
will expire ten years from the date of grant. An option granted under the plan
is not transferrable other than by will or the laws of descent and distribution.
In the event a participant in the plan ceases to be an outside director, other
than by reason of death or change of control of the Company, such participant
may exercise an outstanding option under the plan within ninety days after such
termination, to the extent the participant was entitled to exercise the option
on the date of termination. In the event of the death of a participant under the
plan, such participant's option(s) may be exercised by the executors or
administrators of the optionee's estate or by the legatees of such participant
within one year after his death, so long as the term of the option has not
expired. The Company does not receive any consideration upon the grant of
options under the plan. The options granted under the plan are intended to be
non-qualifying options for federal income tax purposes. Because options under
the plan are not generally transferrable, do not appear to be subject to a
substantial risk of forfeiture and the exercise price will be the fair market
value of the common stock on the date of grant, the options should not be
taxable to an optionee until the optionee exercises the option, at which time
the optionee would recognize income on the difference between the exercise price
and the fair market value of the shares on the date of exercise. The grant of
options under the plan should be treated as compensation paid by the Company for
purposes of the Company's federal income tax considerations. The Board of
Directors may amend the plan without the approval of the stockholders of the
Company in any respect other than the following, which require stockholder
approval: material increases in the number of shares which may be awarded under
the plan, material increases in the benefits accruing to participants under the
plan, material modifications of the requirements for eligibility for
participation in the plan, or any other amendment which requires stockholder
approval by law. The Company currently has five directors, two of whom are
eligible to participate in the plan.
49
<PAGE>
1996 STOCK OPTION PLAN. The 1996 Employee Stock Option Plan provides for
the grant of qualified stock options to the employees of the Company and its
subsidiaries, including officers and directors who are salaried employees. A
total of shares of Common Stock has been authorized and reserved for
issuance under the plan, subject to adjustment to reflect changes in the
Company's capitalization resulting from stock splits, stock dividends and
similar events. The plan is administered by the Employee Plan Committee, which
consists of not less than two and not more than four directors who are not
eligible to participate in the plan. The Committee has the sole authority to
interpret the plan, to determine the persons to whom options will be granted, to
determine the basis upon which the options will be granted, and to determine the
exercise price, duration and other terms of the options to be granted under the
plan; provided that (a) the exercise price of each option granted under the plan
may not be less than the fair market value of the Common Stock on the date the
option is granted (110% of fair market value if the employee is the beneficial
owner of 10% or more of the Company's voting securities), (b) the exercise price
must be paid in cash or by surrendering previously owned shares of Common Stock
upon the exercise of the option, (c) the term of the option may not exceed ten
years, and (d) no option is transferrable other than by will or the laws of
descent and distribution. Upon termination of an optionee's employment (other
than by death or disability), the option may be exercised prior to the
expiration date of the option or within three months after the date of such
termination, whichever is earlier, but only to the extent the optionee had the
right to exercise the option upon the date of such termination. In the event of
the death or disability of an optionee, the option may be exercised by such
person, his guardian, legatee or personal representative at any time prior to
the expiration date of the option, but only to the extent the optionee had the
right to exercise the option as of the date of his death or disability. Options
may not be granted under the plan to any individual if the effect of such grant
would permit that person to have the first opportunity to exercise such options,
in any calendar year, for the purchase of shares having a fair market value (at
the time of grant of the option) in excess of $100,000. Neither the Company nor
any of its subsidiaries will receive any consideration for the granting of
options under the plan. Options granted under the plan are intended to have the
federal income tax consequences of a qualified stock option. As a result, the
exercise of the option will not be a taxable event; the taxable event occurs at
the time the shares of Common Stock acquired upon exercise of the option are
sold. If the optionee holds such shares for the later of two years from the date
the option was granted or one year from the date of exercise of the option, the
difference between the price paid for the shares at exercise and the price for
which those shares are sold will be treated as capital gains income. If the
optionee does not hold the shares for the required holding period, the income
would be treated as ordinary income rather than capital gains income. The grant
of options under the plan will be treated as compensation by the Company for
federal income tax purposes. The Board of Directors may amend the plan, without
stockholder approval, in any respect other than the following, which will
require stockholder approval: increasing the total number of shares for which
options may be granted under the plan, changing the minimum exercise price,
affecting outstanding options or the unexercised rights thereunder, extending
the option period, or extending the termination date of the plan. There are
currently approximately 100 persons who are eligible to participate under the
plan.
CERTAIN TRANSACTIONS
A&P Meter Sales and Services, Inc. ("A&P"), a corporation in which Messrs.
Liedtke, Grella and Musselman owns 60.0% of the outstanding common stock,
supplies meter reading services which measure 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
50
<PAGE>
$612,139 from the Company for meter reading, meter repair, calibration, flow
line installation and other related services provided to the Company. The
Company believes that the services and charges therefor are comparable to those
the Company could have obtained from unaffiliated third parties.
During 1994 and 1995, the Company paid $2,458 and $440,884, respectively, to
Valley for gas compression and salt water disposal charges. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal wells
and gas compressors. Also during 1995, the Company paid CSL $592,920 for
management fees and lease payments on equipment.
During a portion of 1995, the Company leased office space from 511 Tex.,
L.C., in which Messrs. Liedtke, Grella and Musselman are the sole members. The
amount of rental payments to 511 Tex, L.C. during 1995 was $67,896. The Company
no longer leases office space from any affiliated party.
The Company has agreed that, upon the request of NBCC, on up to two
occasions, the Company will register under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws the sale of
the Common Stock owned by NBCC. The Company's obligation is subject to certain
limitations regarding the timing of registrations and certain other matters. The
Company is also obligated to offer to NBCC and Messrs. Liedtke, Grella and
Musselman (collectively, the "Affiliated Holders") the opportunity to include
shares of the Common Stock owned by them in certain registration statements
filed by the Company. In addition, the Company has agreed to indemnify the
Affiliated Holders and their respective officers and directors against
securities law liabilities arising in connection with such offerings, other than
liabilities arising as a result of information furnished to the Company by the
Affiliated Holders participating in the registration. The Company is obligated
to pay all expenses incident to such registration, except underwriters'
discounts and commissions allocable to the sale of shares by Affiliated Holders
and any professional fees and expenses incurred by the Affiliated Holders
incident to such registration. The Affiliated Holders have agreed that they will
not sell any shares of Common Stock for a period of 180 days after the Offerings
without the consent of Prudential Securities Incorporated.
Certain of the transactions comprising the Corporate Reorganization
represent transactions between the Company, or its predecessors, and its
affiliates. Messrs. Liedtke, Grella and Musselman, the shareholders of Valley
and CSL will sell the stock of Valley and the assets of CSL to the Company for
$0.7 million. The purchase price is based on negotiations between Messrs.
Liedtke, Grella and Musselman, on the one hand, and NBCC, considering the value
to the Company of the stock and assets being acquired. No third party conducted
an appraisal of either Valley or CSL.
In addition, Messrs. Liedtke, Grella and Musselman will receive an aggregate
distribution from the LLC of approximately $3.5 million which is estimated to be
the federal income tax liability (as well as the federal income tax liability on
such distribution) which will be owed by Messrs. Liedtke, Grella and Musselman
as a result of the Corporate Reorganization. However, the precise amount of such
liability will be dependent upon a number of factors which cannot be determined
with certainty until subsequent to December 31, 1996. While the amount to be
distributed has been determined in good faith by the Company's independent
accountants, there can be no assurance that the actual tax liability of any of
Messrs. Liedtke, Grella or Musselman will not be less or greater than the
distributed amounts. If the distributed amounts exceed the ultimate tax
liabilities, none of such persons will reimburse the Company. Correspondingly,
if the tax liability exceeds the amount of such distributions, the Company will
not make any further distributions to cover such short-fall. NBCC is also
receiving a distribution of $800,000 which represents its post-redemption
ownership percentage of the distribution made to Messrs. Liedtke, Grella and
Musselman. However, NBCC has no tax or other liability with respect to such
distribution.
DESCRIPTION OF CERTAIN 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
51
<PAGE>
"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% at per annum the end of each successive three month period
(commencing September 10, 1996) up to a maximum of 16.5% per annum. Interest may
be paid in cash or "in kind" by delivery of additional notes having the same
terms as the notes issued pursuant to the Existing Term Loan. Interest under the
Existing Revolver accrues, at the option of the Company, at a margin in excess
of either NationsBank, N.A. "LIBOR" rate, up to a maximum of 5.0% per annum, or
NationsBank, N.A. fluctuating "prime rate" up to a maximum of 2.75% per annum.
The Existing Debt Facility is secured by a pledge of substantially all of
the Company's assets, a guaranty by the Company's subsidiaries and limited
guaranties by Messrs. Liedtke, Grella and Musselman proportionate to their
membership interests in the LLC.
CREDIT FACILITY
The Company is negotiating with several banks to provide the Credit Facility
which will be consummated concurrently with the Offerings. The Company
anticipates that the Credit Facility will provide a revolving facility based on
the borrowing base of its oil and gas assets. Based on its negotiations to date,
the Company anticipates having approximately $50.0 million available pursuant to
the Credit Facility, none of which is expected to be outstanding at its
inception. The Credit Facility is expected to be secured by a pledge of
substantially all of the Company's assets. Messrs. Liedtke, Grella and Musselman
will not guaranty indebtedness due under the Credit Facility.
THE NOTES
The Company is concurrently offering $100 million in aggregate principal
amount of the Notes by means of a separate prospectus. The closing of the Common
Stock Offering and the Notes Offering are conditioned upon each other.
The Notes will be general unsecured obligations of the Company, will be
subordinated in right of payment to all existing and future senior indebtedness
of the Company and will be senior in right of payment to or pari passu with all
other subordinated indebtedness of the Company. The Notes are guaranteed by
certain of the Company's subsidiaries. The Notes will bear interest payable
semi-annually at a rate to be determined at the pricing of the Notes Offering
and will mature in 2006.
The Notes will not be redeemable until 2001. Thereafter, the
Notes will be redeemable at any time at the option of the Company in whole or in
part at the redemption prices set forth in the Indenture. There will be no
mandatory sinking fund for the Notes. Upon the occurrence of a change of
control, the Company will be required to make an offer to purchase all the Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest to the
date of purchase.
The Indenture will contain certain covenants that, among other things, limit
the ability of the Company and certain of its subsidiaries to pay dividends or
make certain other restricted payments, issue preferred stock, incur additional
indebtedness, enter into transactions with affiliates, incur liens, engage in
certain sale and leaseback arrangements, make certain asset dispositions and
merge or consolidate with, or transfer
52
<PAGE>
substantially all of its assets to, any other person. The Indenture will also
contain certain covenants that limit the ability of certain of the Company's
subsidiaries to restrict their ability to make payments to the Company. The
Indenture will contain customary events of default.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $0.10 per share ("Common Stock") and 3,000,000 shares of
Preferred Stock, par value $0.10 per share ("Preferred Stock"). Upon the
completion of the Offerings and the Corporate Reorganization, the issued and
outstanding capital stock of the Company will consist of 10,000,000 shares of
Common Stock (or 10,600,000 shares if the Underwriters' over-allotment option is
exercised in full).
The following description of certain matters relating to the capital stock
of the Company is summary in nature and is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Except as otherwise required by law, 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. The Indenture
governing the Notes limits the issuance of Preferred Stock in some instances.
While providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, and eliminating delays associated
with a stockholder vote on specific issuances, the issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company.
REGISTRATION RIGHTS
The Company has agreed that, upon the request of NBCC, on up to two
occasions, the Company will register under the Securities Act and applicable
state securities laws the sale of the Common Stock owned by NBCC. The Company's
obligation is subject to certain limitations regarding the timing of
registrations and certain other matters. The Company is also obligated to offer
to NBCC and Messrs. Liedtke, Grella and Musselman (collectively, the "Affiliated
Holders") the opportunity to include shares of the Common Stock owned by them in
certain registration statements filed by the Company. In addition, the Company
has agreed to indemnify the Affiliated Holders and their respective officers and
directors against securities law liabilities arising in connection with such
offerings, other than liabilities arising as a result of information furnished
by the Company by the Affiliated Holders participating in the registration. The
Company is
53
<PAGE>
obligated to pay all expenses incident to such registration, except underwriting
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.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and the Delaware
General Corporation Law (the "DGCL") include a number of provisions which may
have the effect of encouraging persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Board of Directors
rather than pursue non-negotiated takeover attempts. These provisions include a
classified board of directors, authorized blank check preferred stock,
restrictions on business combinations and the availability of authorized but
unissued Common Stock.
CLASSIFIED BOARD OF DIRECTORS. The Company's Certificate of Incorporation
and Bylaws contain provisions for a board of directors divided into classes with
only one class standing for election each year. Directors can only be removed
for cause. A staggered board makes it more difficult for stockholders to change
the majority of the directors and instead promotes a continuity of existing
management.
BLANK CHECK PREFERRED STOCK. The Certificate of Incorporation authorizes
blank check Preferred Stock. See "-- Preferred Stock." The Board of Directors
can set the voting rights, redemption rights, conversion rights and other rights
relating to such Preferred Stock and could issue such stock in either a private
or public transaction. In some circumstances, the blank check Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Board of Directors opposes.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the DGCL. In general, Section 203
prevents an "interested stockholder" from engaging in a "business combination"
with a Delaware corporation for three years following the date such person
became an interested stockholder, unless (i) prior to the date such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also officers of the
corporation and stock held by certain employee stock plans; or (iii) on or
subsequent to the date of the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of the stockholders by
the affirmative vote of the holders of two-thirds of the outstanding voting
stock of the corporation not owned by the interested stockholder.
Section 203 defines a "business combination" to include (i) any merger or
consolidation involving the corporation and an interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving an interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to an interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder or (v) the receipt by an
interested stockholder of any loans, guarantees, pledges or other financial
benefits provided by or through the corporation. For purposes of Section 203,
the term "corporation" also includes the Company's majority-owned subsidiaries.
In addition, Section 203 defines an "interested stockholder" as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
STOCKHOLDER ACTION
With respect to any act or action required of or by the holders of the
Common Stock, the affirmative vote of a majority of the shares of Common Stock
present in person or represented by proxy at a meeting and entitled to vote
thereon is sufficient to authorize, affirm, ratify or consent to such act or
actions, except as otherwise provided by law or in the Certificate of
Incorporation. The DGCL requires the approval of the
54
<PAGE>
holders of a majority of the outstanding stock entitled to vote for certain
extraordinary corporate transactions, such as a merger, sale of substantially
all assets, dissolution or amendment of the Certificate of Incorporation.
Pursuant to Delaware law, stockholders may take actions without the holding
of a meeting by written consent or consents signed by the holders of a
sufficient number of shares to approve the transaction had all of the
outstanding shares of the capital stock of the Company entitled to vote thereon
been present at a meeting. The Affiliated Holders will own 49.2% of the
outstanding Common Stock after the Offering. See "Security Ownership of Certain
Beneficial Owners and Management." Pursuant to the rules and regulations of the
Commission, if stockholder action is taken by written consent, the Company will
be required to send each stockholder entitled to vote on the matter acted on,
but whose consent was not received, an information statement containing
information substantially similar to that which would have been contained in a
proxy statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be
.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Common Stock Offering, the Company will have a total
of 10,000,000 shares of Common Stock outstanding. Of these shares, the 4,000,000
shares of Common Stock offered hereby (4,600,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
6,000,000 shares of Common Stock outstanding will be "restricted securities" as
that term is defined by Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 100,000 shares upon completion
of the Common Stock Offering) or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements, and to the availability of current
public information about the Company. In addition, a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above.
Under Rule 144 (and subject to the conditions thereof, including the volume
limitations described above), approximately 4,919,992 of the 6,000,000
restricted shares will become eligible for sale 90 days after the Common Stock
Offering. All 6,000,000 of the restricted shares are subject to lockup
restrictions. Pursuant to these restrictions the holders of these restricted
shares, including certain of its executive officers and directors and NBCC, have
agreed that they will not, subject to certain exceptions, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract to sell, pledge, grant of any options to purchase or
sale or disposition) of any shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock or other capital stock of the Company without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, for a period of 180 days from the date of this Prospectus. After
such 180-day period, this restriction will expire and shares permitted to be
sold under Rule 144 would be eligible for sale. In addition, NBCC has demand
registration rights to require the Company to file up to two registration
statements under the Securities Act of the shares of Common Stock held by such
holder and the other major stockholders have "piggyback" registration rights,
which would permit such holders to resell such shares without complying with
Rule 144. Registration and sale of such shares could have an adverse effect on
the trading price of the Common Stock. The Company currently has only one stock
option outstanding for 75,000 shares. See "Executive Compensation and Other
Information."
Prior to the Common Stock Offering, there has been no public market for the
Common Stock and no predictions can be made of the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
56
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Rauscher Pierce Refsnes, Inc. are acting as
Representatives, have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated.....................................................
Rauscher Pierce Refsnes, Inc...........................................................
----------
Total................................................................................ 4,000,000
----------
----------
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share; and
that such dealers may reallow a concession of $ per share to certain other
dealers. After the initial public offering, the offering price and the
concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number of shares set forth
opposite each Underwriters' name in the preceding table bears to 4,000,000.
The Company, its executive officers and directors, and all of the Company's
stockholders have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase, or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, for a period
of 180 days after the date of this Prospectus.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock of the Company. Consequently, the initial public offering price for
the Common Stock will be determined through negotiation between the Company and
the Representatives of the Underwriters. Among the factors to be considered in
making such determination will be the prevailing market conditions, the results
of operations of the Company in recent periods relevant to its prospects and the
prospects for its industry in general, the management of the Company and the
market prices of securities for companies in businesses similar to that of the
Company.
57
<PAGE>
PGI is a lender under the Existing Debt Facility. See "Description of
Certain Indebtedness." The lenders under the Existing Debt Facility will receive
customary fees and other compensation. PGI will receive its proportionate share
of the repayment by the Company of borrowings under the Existing Debt Facility
from the net proceeds of the Notes Offering. Prudential Securities Incorporated
is also acting as an underwriter in the Company's concurrent Notes Offering for
which it will receive customary underwriting discounts and commissions.
LEGAL MATTERS
Certain legal matters related to the Common Stock offered hereby are being
passed upon for the Company by Cotton, Bledsoe, Tighe & Dawson, a Professional
Corporation, Midland, Texas. Certain matters will be passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1995 and for the year then ended, the statements
of revenues and direct operating expenses of the 1996 Acquisition for the years
ended December 31, 1993, 1994 and 1995, and the statements of revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1994, and for the years ended December 31, 1993
and 1994, have been included herein and in the registration statement in
reliance upon the report of Elms, Faris & Co., P.C., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
In September 1995, the Company changed its principal accountants from Elms,
Faris & Co., P.C. to KPMG Peat Marwick LLP. The reports of Elms, Faris & Co.,
P.C. on the Company's financial statements for the year ended December 31, 1994
did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified in any way as to uncertainty, audit scope or accounting
principles. Moreover, there were no disagreements with Elms, Faris & Co., P.C.
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
Certain information appearing in this Prospectus regarding estimated
quantities of oil and gas reserves and the discounted present value of future
pre-tax cash flows therefrom attributable to the Company's properties and to the
properties included in the 1996 Acquisition is based upon estimates of such
reserves and present values prepared by Williamson Petroleum Consultants, Inc.
All of such information has been so included herein in reliance upon the
authority of such firm as experts in such matters. Set forth as Appendix A is
Williamson's Summary Reserve Report dated July 23, 1996 with respect to the oil
and gas interests of the Company and with respect to properties acquired in the
1996 Acquisition.
AVAILABLE INFORMATION
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information filed
by the Company with the Commission can be inspected at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Regional Offices of the Commission at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7
World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
58
<PAGE>
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 Common Stock 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 Common Stock 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.
59
<PAGE>
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ALL-IN FINDING COSTS. The amount of total capital expenditures, including
acquisition costs, and exploration and abandonment costs for oil and gas
activities divided by the amount of proved reserves (expressed in BOE) added
during the specified period (including the effect on proved reserves of reserve
revisions).
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet.
BOE. Equivalent barrels of oil. In reference to natural gas, natural gas
equivalents are determined using the ratio of six Mcf of natural gas to one Bbl
of crude oil, condensate or natural gas liquids.
BTU. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY WELL. A well found to be incapable of producing either oil or gas in
sufficient quantifies to justify completion of an oil or gas well.
EBITDA. Calculated by adding interest, income taxes, depreciation,
depletion and amortization and exploration and abandonment costs to net income
(loss).
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MMBOE. One million barrels of oil equivalent.
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MMCF. One million cubic feet.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES OR PV-10 VALUE. The present
value of estimated future net revenues is an estimate of future net revenues
from a property at its acquisition date, at a specified date, after deducting
production and ad valorem taxes, future capital costs and operating expenses,
but before deducting federal income taxes. The future net revenues have been
discounted at an annual rate of 10% to determine their "present value." The
present value is shown to indicate the 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.
60
<PAGE>
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.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Costilla Energy, L.L.C.:
Independent Auditors' Reports...................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994,
and 1995, and the Three Months ended March 31, 1995 and 1996 (unaudited).......... F-5
Consolidated Statements of Members' Capital for the Years Ended December 31, 1993,
1994, and 1995, and the Three Months ended March 31, 1996 (unaudited)............. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994,
and 1995, and the Three Months ended March 31, 1995 and 1996 (unaudited).......... F-7
Notes to Consolidated Financial Statements......................................... F-8
Financial Statements of the 1995 Acquisition:
Independent Auditors' Report....................................................... F-21
Statements of Revenues and Direct Operating Expenses for the Years Ended December
31, 1993 and 1994 and the period ended June 12, 1995.............................. F-22
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-23
Financial Statements of the 1996 Acquisition:
Independent Auditors' Report....................................................... F-26
Statements of Revenues and Direct Operating Expenses for the Years Ended December
31, 1993, 1994 and 1995, and the periods ended March 31, 1995 and 1996
(unaudited)....................................................................... F-27
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C. (a Texas limited liability company):
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries as of
December 31, 1995, and the related consolidated statement of operations,
members' capital, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Costilla
Energy, L.L.C. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
April 16, 1996 (except with respect to matters discussed in the last paragraph
of Note 7 and Note 12, as to which the date is May 28, 1996.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries (the
combination of CSL Partners, Costilla Petroleum Corporation and Statewide
Minerals, L.C.) as of December 31, 1994, and the related consolidated statements
of operations, members' capital, and cash flows for the years ended December 31,
1993 and 1994. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Costilla Energy, L.L.C. and subsidiaries as of December 31, 1994, and the
results of their operations and their cash flows for the years ended December
31, 1993 and 1994, in conformity with generally accepted accounting principles.
ELMS, FARIS & CO., P.C.
Midland, Texas
March 31, 1995
F-3
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 137 $ 2,616 $ 2,760
Restricted cash......................................................................... -- 250 250
Accounts receivable:
Trade, net............................................................................ 1,042 3,154 2,401
Affiliates............................................................................ -- 507 994
Oil and gas sales..................................................................... 1,715 3,915 4,189
Prepaid and other current assets........................................................ 223 439 800
------- ------- -----------
Total current assets.............................................................. 3,117 10,881 11,394
------- ------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties..................................................................... 22,794 79,897 83,965
Unproved properties................................................................... 2,060 2,903 3,580
Accumulated depletion, depreciation and amortization.................................... (3,562) (9,413) (11,281)
------- ------- -----------
21,292 73,387 76,264
------- ------- -----------
Other property and equipment, net......................................................... 76 679 1,024
Deferred charges (Note 2)................................................................. 29 1,736 1,658
Note receivable -- affiliate.............................................................. 390 684 684
------- ------- -----------
$24,904 $87,367 $91,024
------- ------- -----------
------- ------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................................... $ 22 $ -- $ --
Trade accounts payable.................................................................. 1,712 5,467 6,190
Undistributed revenue................................................................... 110 1,227 1,026
Other current liabilities............................................................... 192 1,691 2,074
------- ------- -----------
Total current liabilities......................................................... 2,036 8,385 9,290
------- ------- -----------
Long-term debt, less current maturities (Note 7).......................................... 23,591 71,494 74,494
Deferred income (Note 2).................................................................. 24 3,319 3,097
Other noncurrent liabilities.............................................................. -- 38 --
------- ------- -----------
Total liabilities................................................................. 25,651 83,236 86,881
------- ------- -----------
Redeemable members' capital (Note 10)..................................................... -- 11,320 11,678
------- ------- -----------
Members' capital (Note 10)................................................................ (747) (7,189) (7,535)
Commitments and contingencies (Note 8).................................................... -- -- --
------- ------- -----------
$24,904 $87,367 $91,024
------- ------- -----------
------- ------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales............................................ $ 4,231 $ 7,637 $ 21,693 $ 2,177 $ 8,833
Interest and other........................................... 56 87 123 3 88
Gain on sale of assets....................................... 110 112 -- -- 30
--------- --------- --------- --------- ---------
4,397 7,836 21,816 2,180 8,951
--------- --------- --------- --------- ---------
Expenses:
Oil and gas production....................................... 1,688 2,351 10,355 896 3,659
General and administrative................................... 952 1,184 3,571 459 1,362
Exploration and abandonments................................. 218 793 1,650 1,007 228
Depreciation, depletion and amortization..................... 884 1,847 6,095 462 1,986
Interest..................................................... 605 1,458 4,454 407 1,704
Other........................................................ -- -- 2 -- --
--------- --------- --------- --------- ---------
4,347 7,633 26,127 3,231 8,939
--------- --------- --------- --------- ---------
Net income (loss) before federal income taxes.............. $ 50 $ 203 $ (4,311) $ (1,051) 12
Provision for federal income taxes
Current...................................................... (25) 8 3 -- --
Deferred..................................................... 2 32 -- -- --
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ 73 $ 163 $ (4,314) $ (1,051) $ 12
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS'
CAPITAL
-----------
<S> <C>
Balance at January 1, 1993............................................................................. $ 433
Net income........................................................................................... 73
Contributions........................................................................................ 1
Withdrawals.......................................................................................... (456)
-----------
Balance at December 31, 1993........................................................................... 51
Net income........................................................................................... 163
Withdrawals.......................................................................................... (961)
-----------
Balance at December 31, 1994........................................................................... (747)
Issuance costs (Note 10)............................................................................. (753)
Net loss............................................................................................. (4,314)
Withdrawals.......................................................................................... (55)
Preferred return on redeemable members' capital...................................................... (1,320)
-----------
Balance at December 31, 1995........................................................................... (7,189)
Net income (unaudited)............................................................................... 12
Preferred return on redeemable members' capital (unaudited).......................................... (358)
-----------
Balance at March 31, 1996 (unaudited).................................................................. $ (7,535)
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------
1993 1994 1995
--------- ---------- ---------- 1995
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 73 $ 163 $ (4,314) $ (1,051)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 884 1,847 5,958 462
Amortization of deferred charges........................................ -- -- 137 --
Other noncash........................................................... (21) 35 (75) (67)
Gain on sale of oil and gas properties.................................. (110) (112) -- --
Change in operating assets and liabilities:
Increase in accounts receivable....................................... (837) (1,535) (4,818) (1,562)
Decrease (increase) in other assets................................... 20 301 (216) (146)
Increase in accounts payable.......................................... 262 723 4,863 537
Increase in other liabilities......................................... 59 102 1,537 --
Increase (decrease) in deferred income................................ (8) 3 3,294 --
--------- ---------- ---------- ---------
Total adjustments................................................... 249 1,364 10,680 (776)
--------- ---------- ---------- ---------
Net cash provided by (used in) operating activities................. 322 1,527 6,366 (1,827)
--------- ---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures for oil and gas properties........................... (6,634) (11,819) (61,500) (1,342)
Proceeds from sale of oil and gas properties.............................. 131 112 -- --
Additions to other property and equipment................................. (228) (49) (720) (47)
Advances on affiliate notes receivable.................................... -- (390) (247) --
--------- ---------- ---------- ---------
Net cash used in investing activities............................... (6,731) (12,146) (62,467) (1,389)
--------- ---------- ---------- ---------
Cash flows from financing activities:
Borrowings under long-term debt........................................... 6,770 11,579 62,704 1,960
Payments of long-term debt................................................ -- -- (11,232) (7,880)
Deferred loan and financing costs......................................... -- -- (2,587) (753)
Proceeds from redeemable members' capital................................. -- -- 10,000 10,000
Contributions............................................................. 1 -- -- --
Withdrawals............................................................... (456) (961) (55) (55)
--------- ---------- ---------- ---------
Net cash provided by financing activities........................... 6,315 10,618 58,830 3,272
--------- ---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents........................ (94) (1) 2,729 56
Cash and cash equivalents, beginning of period.............................. 232 138 137 137
--------- ---------- ---------- ---------
Cash and cash equivalents, end of period.................................... $ 138 $ 137 $ 2,866 $ 193
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
<CAPTION>
1996
---------
<S> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 12
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 1,986
Amortization of deferred charges........................................ 78
Other noncash........................................................... (47)
Gain on sale of oil and gas properties.................................. (30)
Change in operating assets and liabilities:
Increase in accounts receivable....................................... (7)
Decrease (increase) in other assets................................... (361)
Increase in accounts payable.......................................... 522
Increase in other liabilities......................................... 345
Increase (decrease) in deferred income................................ (222)
---------
Total adjustments................................................... 2,264
---------
Net cash provided by (used in) operating activities................. 2,276
---------
Cash flows from investing activities:
Capital expenditures for oil and gas properties........................... (4,749)
Proceeds from sale of oil and gas properties.............................. --
Additions to other property and equipment................................. (383)
Advances on affiliate notes receivable.................................... --
---------
Net cash used in investing activities............................... (5,132)
---------
Cash flows from financing activities:
Borrowings under long-term debt........................................... 3,000
Payments of long-term debt................................................ --
Deferred loan and financing costs......................................... --
Proceeds from redeemable members' capital................................. --
Contributions............................................................. --
Withdrawals............................................................... --
---------
Net cash provided by financing activities........................... 3,000
---------
Net increase (decrease) in cash and cash equivalents........................ 144
Cash and cash equivalents, beginning of period.............................. 2,866
---------
Cash and cash equivalents, end of period.................................... $ 3,010
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(1) ORGANIZATION AND NATURE OF OPERATIONS
Costilla Energy, L.L.C. (the "Company"), a Texas limited liability company,
was formed on February 14, 1995, as the successor to CSL Partners, a Texas
general partnership, which was organized on January 11, 1989. The Company is an
unincorporated association of several individuals and a corporation and will
cease to exist thirty (30) years from the date of formation. Its members have
limited personal liability for the Company's obligations and debts. The Company
is classified as a partnership for federal income tax purposes.
The Company is an oil and gas exploration and production concern with
properties located principally in West Texas, South Texas, and the Rocky
Mountain regions of the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
As of December 31, 1995, the consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
accounts and transactions between the Company and its subsidiaries have been
eliminated. At December 31, 1993 and 1994, the financial statements of the
Company and its affiliates were combined. Significant intercompany transactions
were eliminated.
USE OF ESTIMATES
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and depository accounts held by banks.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of unsecured accounts receivable from
unaffiliated working interest owners and crude oil and natural gas purchasers.
HEDGING
Premiums paid for commodity option contracts and interest rate swap
agreements are amortized to oil and gas sales and interest expense,
respectively, over the terms of the agreements. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts receivable
under the commodity option contracts and interest rate swap agreements are
accrued as an increase in oil and gas sales and a reduction of interest expense,
respectively, for the applicable periods.
OIL AND GAS PROPERTIES
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and
F-8
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
average holding period. Capitalized costs of producing oil and gas properties,
after considering estimated dismantlement and abandonment costs and estimated
salvage values, are depreciated and depleted by the unit-of-production method.
Support equipment and other property and equipment are depreciated over their
estimated useful lives.
On sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
IMPAIRMENT OF LONG-LIVED ASSETS
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 -- ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS 121").
Consequently, the Company reviews its long-lived assets to be held and used,
including oil and gas properties accounted for under the successful efforts
method of accounting, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected future cash flows is less than the carrying
amount of the assets. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
DEFERRED CHARGES
The Company capitalized certain costs incurred in connection with obtaining
the Credit Agreement and the related revolver and term notes (see Note 7 for
definitions and descriptions of each). These costs are being amortized over the
lives of the notes.
DEFERRED INCOME
In November 1995, the Company entered into gas sales agreements whereby it
committed to delivery of a total of 2,379,000 Mmbtu, from December 1, 1995
through December 1, 1996, for a total fixed price of $3,429,610. Income from the
agreements is recognized in the period of delivery.
REVENUE RECOGNITION
The Company uses the production method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in tanks, if
material, is recorded as inventory in the accompanying consolidated financial
statements.
The Company uses the sales method of accounting for natural gas revenues
adjusted for over and under produced amounts associated with gas balancing
arrangements. Under this method, revenues are recognized based on actual volumes
of gas sold to purchasers.
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under gas
balancing agreements in excess of the Company's interest in properties covered
by such agreements. The Company had $157,785 of deferred income associated with
gas balancing at December 31, 1995. There was no significant deferred income at
December 31, 1994.
F-9
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ENVIRONMENTAL
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
INTERIM FINANCIAL STATEMENTS
The interim financial information as of March 31, 1996, and for the three
months ended March 31, 1995 and 1996, is unaudited. However, in the opinion of
management, these interim financial statements include all the necessary
adjustments to fairly present the results of the interim periods and all such
adjustments are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements for the
years ended December 31, 1993, 1994 and 1995.
(3) ACQUISITION OF OIL AND GAS PROPERTIES
On June 12, 1995, the Company completed the acquisition of certain oil and
gas properties and related assets from Parker & Parsley Development L.P. and
Parker & Parsley Producing L.P. for $46,621,371. The Company funded the
acquisition under the Credit Agreement described in Note (7). Certain of the
acquired properties, which were located outside of the Company's areas of
strategic focus, were sold in 1995. No gain or loss was recorded on these sales.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted FAS 121 effective as of January 1, 1995. FAS 121
requires that long-lived assets held and used by an entity, including oil and
gas properties accounted for under the successful efforts method of accounting,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets
to be disposed of are to be accounted for at the lower of carrying amount or
fair value less cost to sell when management has committed to a plan to dispose
of the assets. All companies, including successful efforts oil and gas
companies, are required to adopt FAS 121 for fiscal years beginning after
December 15, 1995.
In order to determine whether an impairment had occurred, the Company
estimated the expected future cash flows of its oil and gas properties and
compared such future cash flows to the carrying amount of the oil and gas
properties to determine if the carrying amount was recoverable. Based on this
process, no writedown in the carrying amount of the Company's proved properties
was necessary at December 31, 1995.
(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.
F-10
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(5) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
COMMODITY HEDGES. The Company utilizes option contracts to hedge the effect
of price changes on future oil and gas production. The following table sets
forth the future volumes hedged by year and the weighted-average strike price of
the option contracts at December 31, 1995:
<TABLE>
<CAPTION>
OIL GAS
VOLUME VOLUME STRIKE PRICE
(BBLS) (MMBTU) PER BBL/MMBTU
---------- ---------- --------------------
<S> <C> <C> <C>
Oil:
1996.................................................. 1,830,000 -- $16.00 - $20.38(a)
1997.................................................. 912,500 -- $16.00 - $20.65(a)
Gas:
1996.................................................. -- 1,500,000 $1.65(b)
1997.................................................. -- 1,350,000 $1.65(b)
</TABLE>
- ------------------------
(a) Represents the weighted-average price of collars established with the
purchase of put option contracts and the sale of call option contracts.
(b) Represents the strike price on purchased put option contracts.
INTEREST RATE SWAP AGREEMENTS. The Company utilizes interest rate swap
agreements to reduce the potential impact of increases in interest rates on
floating-rate, long-term debt. At December 31, 1995, the Company was a party to
two interest rate swap agreements, providing the Company with a fixed interest
rate for the terms of the agreements. The following table sets forth the terms,
fixed rates, and notional amounts of the agreements in place as of December 31,
1995:
<TABLE>
<CAPTION>
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
- ---------------------------------- ------------- ------------------------------
<S> <C> <C>
Jan. 25, 1996 to Jan. 25, 1999 $24 million ranging from 7.5% to 8.5%
May 24, 1995 to May 27, 1997 $60 million 5.99%
</TABLE>
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1994 and 1995. FASB
Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
($ 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>
F-11
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH, TRADE RECEIVABLES, AND TRADE PAYABLES: The carrying amounts
approximate fair value because of the short maturity of those instruments.
OTHER CURRENT ASSETS: The amounts reported relate to the commodity option
contracts and interest rate swap agreements described in Note 5. The carrying
amount comprises the unamortized premiums paid for the contracts. The fair value
is estimated using option pricing models and essentially values the potential
for the contracts and agreements to become in-the-money through changes in
commodity prices and interest rates during the remaining terms.
NOTES RECEIVABLE-AFFILIATE: The amounts reported relate to notes receivable
from an affiliated company. The carrying amount approximates fair value because
the rate given to the affiliate company is not materially different from the
affiliate company's bank debt.
DEFERRED INCOME: The amounts reported relate to the gas purchase agreements
described in Note 2. The carrying amount represents the payments received under
the agreements for which subsequent delivery is required. The fair value is
estimated based upon the commodity price at December 31, 1995, for a similar
agreement.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated
by discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
(7) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Revolver note........................................................... $ -- $ 59,824
Term notes.............................................................. -- 11,670
Note payable to bank.................................................... 23,591 --
Note payable to member.................................................. 22 --
--------- ---------
23,613 71,494
Less current maturities............................................. 22 --
--------- ---------
$ 23,591 $ 71,494
--------- ---------
--------- ---------
</TABLE>
At December 31, 1995, the Company and certain of its subsidiaries are
parties to a Credit Agreement with a syndicate of banks (the "Banks"). The
Credit Agreement provides for an aggregate $185 million senior secured revolving
line of credit ("Revolver Notes") and an aggregate of $15 million in senior
secured term notes ("Term Notes"). All notes are secured with the assets of the
Company and are guaranteed by the Company's subsidiaries and, to a limited
extent, its individual members.
The Revolver Notes and Term Notes are subject to an aggregate borrowing
base, as determined by the Banks or their agents in their sole discretion and is
redetermined at least bi-annually as of January 15 and July 15, utilizing oil
and gas reserve information as of the immediately preceding period end. As of
January 15, 1996, the borrowing base was $71,670,000.
F-12
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(7) LONG-TERM DEBT (CONTINUED)
All outstanding balances under the Credit Agreement may be designated, at
the Company's option, as either "Base Rate Portions" or "Fixed Rate Portions"
(both as defined in the Credit Agreement), provided that no more than five
Eurodollar Tranches may be outstanding at any time. The Base Rate Portions of
the Revolver Notes bear interest at the fluctuating Base Rate, plus a Revolver
Base Rate Spread ranging from 0.25% to 0.75%, depending upon the outstanding
principal balances of the Term Notes. The Base Rate Portions of the Term Notes
bear interest at the fluctuating Base Rate plus 0.75%. The Fixed Rate Portions
of the Revolver Notes bear interest at the Eurodollar Rate for a fixed period of
time elected by the Company, plus a Revolver Fixed Rate Spread ranging from
2.25% to 3.00%, depending on the outstanding principal balances of the Term
Notes. The Fixed Rate Portions of the Term Notes bear interest at the Eurodollar
Rate for a fixed period of time elected by the Company, plus a Fixed Rate Spread
of 3.00%. As of December 31, 1995, the Company had elected a fixed rate of 8.82%
for the Revolver Notes and had elected fixed rates ranging from 8.82% to 8.94%
for $14,000,000 of the outstanding Term Notes at December 31, 1995. The
remaining balances of the Term Notes bear interest at the Base Rate of
NationsBank Prime plus 1.50% at December 31, 1995.
The outstanding principal balance of the Revolver Notes is due and payable
in sixty (60) monthly installments beginning August 1, 1996, and continuing
regularly thereafter until July 1, 2001. The outstanding principal balance of
the Term Notes is due and payable in two (2) installments, each of which shall
be equal to one-half of the unpaid principal balance of each note, on July 1,
1996, and January 1, 1997.
The Credit Agreement requires the Company to hedge not less than 60% of the
Company's total sales volume, through December 31, 1997, from its proved
developed producing oil and gas reserves, with a floor price of not less than
$16 per Bbl of oil or $1.50 per Mcf of gas.
Additionally, the Credit Agreement contains various restrictive covenants
and compliance requirements, which include: (a) restrictions on dividends and
the incurrence of additional indebtedness; (b) restrictions as to merger, sale
or transfer of assets; (c) limiting total lease payments and total aggregate
executive compensation to $750,000 and $500,000, respectively, in any fiscal
year; and (d) compliance with certain financial ratios.
The Company was in violation of certain covenants and compliance
requirements as of December 31, 1995. Subsequent to December 31, 1995, such
violations were waived by the Banks.
Maturities of long-term debt at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996....................................................... $ 10,820
1997....................................................... 17,800
1998....................................................... 11,965
1999....................................................... 11,965
2000....................................................... 11,965
Thereafter................................................. 6,979
</TABLE>
The Company paid interest on long-term debt of $546,147, $1,356,604 and
$4,453,684 in 1993, 1994 and 1995, respectively.
As described in Note 12, on June 10, 1996, the Company entered into a new
loan agreement, proceeds of which were used to repay the existing notes.
F-13
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and office facilities under operating leases on
which rental expense for the years ended December 31, 1993, 1994 and 1995, was
$110,023, $197,533 and $311,221, respectively. Future minimum lease commitments
under noncancellable operating leases at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996........................................................ $ 257
1997........................................................ 272
1998........................................................ 268
1999........................................................ 195
2000........................................................ 188
Thereafter.................................................. 1,190
</TABLE>
SEVERANCE AGREEMENTS
On February 17, 1995, the Company entered into employment agreements with
each of the officers which are effective from the above date through February
17, 2000, or until terminated by the officer or the Company. In addition to
providing a base salary and nominal yearly increases for each officer, the
employment agreements provide for severance payments upon termination of any
such officer's employment or a significant reduction in that officer's duties or
responsibilities.
In the event of such a termination, the Company is obligated to pay the
officer an amount equal to the present value (discounted at 10%) of the
officer's salary which would have been paid through February 17, 2000. The
current annual base salaries for the officers covered under such employment
agreements total approximately $500,000.
EXPLORATION AND DEVELOPMENT
On July 6, 1995, the Company, entered into an agreement with an unaffiliated
third party which had previously obtained a concession from the Republic of
Moldova whereby the Company committed to develop several oil and gas fields in
the Republic of Moldova, commencing in 1995, and embark on a multi-year 400
kilometer seismic survey, beginning in 1996, in exchange for the exclusive right
to develop and explore for oil and gas in the Republic of Moldova. Through
December 31, 1995, the Company has incurred $214,178 in connection with these
activities.
LETTERS OF CREDIT
As a result of certain bonding and trade creditor requirements, the Company
has caused irrevocable letters of credit to be issued by a bank totaling
$106,000. As of December 31, 1995, no amounts had been drawn on these letters of
credit.
(9) 401(K) PLAN
The Company has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and the Company has an option to match a percentage of the employee's
contribution. The Company has made matching contributions to the plan totaling
$16,950, $8,921 and $22,531 in 1993, 1994 and 1995, respectively.
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
During 1995, NationsBank Capital Corporation ("NBCC") contributed $10
million in exchange for a 30% ownership interest in the Company including the
preferential return described below. The Company incurred $751,737 in legal fees
and broker's commissions in connection with this transaction and recorded these
costs as direct charges to members' capital in 1995.
F-14
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL (CONTINUED)
Redeemable members' capital is subject to a preferential return of 15% per
annum and is redeemable at any time at the Company's option, subject to a
redemption premium as described below, or at NBCC's option on February 17, 2003
or at an earlier date upon occurrence of certain events including a change in
control, certain changes in management, a change in the Company's status as a
limited liability company for tax purposes, or violation of any of various other
restrictive provisions contained in the Regulations of Costilla Energy, L.L.C.
(the "Regulations"). The 15% preferred return is treated as a reduction of
members' capital. The redemption price to be paid by the Company shall be equal
to the initial amount received for the preferred units plus a premium,
determined in the year the units are purchased, as follows:
<TABLE>
<CAPTION>
YEAR AFTER PREMIUM
FEBRUARY 17, 1995 PERCENTAGE
- ----------------------- -------------
<S> <C>
1 10%
2 10%
3 8%
4 6%
5 4%
6 2%
7 0%
8 0%
</TABLE>
NBCC's 30% members' interest may be repurchased by the Company to the extent
the Company has exercised its right to redeem all or a portion of the redeemable
members' capital or the Company may be required to purchase NBCC's members'
capital upon the occurrence of certain events similar to those events requiring
redemption of the redeemable members' capital described above, but not on any
specified date in the future. The redemption price the Company would pay is
determined by the year in which the members' capital is repurchased, as follows:
<TABLE>
<CAPTION>
AGGREGATE
BEFORE FEBRUARY 17 REDEMPTION PRICE
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 1
1997.............................................................. 1,500,000
1998.............................................................. 3,000,000
1999.............................................................. 4,500,000
2000.............................................................. 5,500,000
</TABLE>
At December 31, 1995, the Company was in violation of various restrictive
provisions of the Regulations. Subsequent to December 31, 1995, NBCC waived such
violations.
(11) RELATED PARTY TRANSACTIONS
Certain members and officers of the Company own interests in and hold
positions with A&P Meter Service and Supply, Inc. ("A&P"), CSL Management
Corporation ("CSL"), 511 Tex L.C. ("511 Tex") and Valley Gathering Company
("Valley").
Advances from the Company to A&P have been consolidated into two promissory
notes. The first note, which was originally executed December 31, 1994, totals
$390,000, including accrued interest of $20,000 at December 31, 1995. The note
bears interest at a floating rate equal to the "prime rate" plus 1.0%. No
principal or interest payments are due until the maturity of the note at
December 31, 2004. The note is secured by a second lien on A&P's accounts
receivable, inventory and equipment. The second note is in the amount of
$294,000, including accrued interest of $47,000, and is dated May 22, 1996. The
note bears interest at 6.0% per annum, is unsecured and is payable upon demand.
During 1995, the Company paid $612,139 to A&P for goods and services provided.
F-15
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(11) RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993, 1994 and 1995, the Company paid $312,623, $549,620 and
$592,920, respectively, to CSL for management fees and lease payments on
equipment.
During 1995, the Company paid $67,896 to 511 Tex for office rent.
During 1994 and 1995, the Company paid $2,458 and $440,884, respectively, to
Valley for gas compression and salt water disposal charges. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal wells
and gas compressors.
(12) SUBSEQUENT EVENTS
On March 8, 1996, the Company executed a Purchase and Sale Agreement with
Parker and Parsley Petroleum Company to acquire certain oil and gas properties
for an estimated adjusted purchase price of approximately $40 million. The
properties are located primarily in south and west Texas. The acquisition closed
on June 14, 1996.
In connection with the foregoing, the Company entered into a new loan
agreement with NationsBridge L.L.C., an affiliate of the Company's current
lender, to provide financing of up to $125 million in advances (the "Loans"),
subject to certain terms and conditions. Proceeds of the Loans were used to fund
the Acquisition, to refinance substantially all of the Company's outstanding
indebtedness, and for other general corporate purposes.
Advances under the Loans were to be made in two portions, Tranche A was up
to $95,000,000 and Tranche B was $30,000,000. Tranche A initially bears
interest, at the Company's option, at the applicable prime rate ("Prime") plus
0.75% or LIBOR plus 3.0%. Each margin above Prime and LIBOR increases by 0.50%
at the end of each successive three-month period, up to a maximum of 2.75% and
5.0% for Prime and LIBOR, respectively. Tranche B initially bears interest at
14.00% per annum, increasing 0.50% at the end of each successive three-month
period, up to a maximum of 16.5%.
Tranche A loans are subject to a borrowing base determination. The initial
borrowing base is $95,000,000 which is automatically reduced by $3,000,000 per
quarter beginning January 1, 1997. The borrowing base is also subject to
periodic redetermination by NationsBridge L.L.C. based on its determination of
the collateral value of the Company's oil and gas properties. Final maturity of
loans made under Tranches A and B is June 10, 1999.
The Loans are secured by first priority liens, assignments and security
interests in all oil and gas properties, pipelines and gathering systems of the
Company and stock of the Company's subsidiaries. Additionally, the Loans are
subject to various restrictive covenants and compliance requirements, including
but not limited to (a) restrictions on dividends and the incurrence of
additional indebtedness, (b) minimum limitations on the Company's current ratio
and tangible net worth, (c) limitations on payments for leases and executive
compensation, (d) maximum limitations on general and administrative expenses,
capital expenditures and the Company's ratio of debt to adjusted cash flow, and
(e) a requirement to pay to the lender all net oil and gas revenues (as defined
and as adjusted for capital expenditures) on a quarterly basis.
The Company paid the lender's fees and expenses in connection with obtaining
the Loans. The fees were approximately $2,625,000 and will increase by an
additional $625,000 if the Tranche B Loans remain outstanding for more than 90
days. In addition, if the Tranche B amounts are not repaid within one year, an
additional amount of $4,800,000 will accrue.
F-16
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(13) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Property acquisition costs:
Proved.......................................................... $ 4,665 $ 9,649 $ 52,470 $ 2,246
Unproved........................................................ 829 1,232 1,742 677
Exploration....................................................... 2,017 2,167 5,627 1,822
Development....................................................... -- -- 158 232
--------- --------- --------- ------
$ 7,511 $ 13,048 $ 59,997 $ 4,977
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located principally
in the United States, were prepared by the Company as of December 31, 1993, 1994
and 1995, and Williamson Petroleum Consultants as of March 31, 1996. Reserves
were estimated in accordance with guidelines established by the SEC and FASB
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the reserve estimates
utilizing an oil price of $17.79 per Bbl and a gas price of $2.03 per Mcf as of
December 31, 1995, and an oil price of $20.71 per Bbl and a gas price of $2.00
per Mcf as of March 31, 1996.
F-17
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND CONDENSATE GAS
(MBBLS) (MMCF)
------------------- -------------
<S> <C> <C>
Total Proved Reserves:
Balance, January 1, 1993....................................................... 1,985 16,418
Revisions of previous estimates.............................................. 57 1,160
Extensions and discoveries................................................... 380 591
Production................................................................... (158) (865)
Purchases of minerals-in-place............................................... 101 4,315
------ ------
Balance, December 31, 1993..................................................... 2,365 21,619
Revisions of previous estimates.............................................. (460) (5,424)
Extensions and discoveries................................................... 761 1,520
Production................................................................... (330) (1,600)
Purchases of minerals-in-place............................................... 1,673 11,397
------ ------
Balance, December 31, 1994..................................................... 4,009 27,512
Revisions of previous estimates.............................................. (570) 425
Extensions and discoveries................................................... 605 8,922
Production................................................................... (950) (4,806)
Purchases of minerals-in-place............................................... 7,694 46,099
------ ------
Balance, December 31, 1995..................................................... 10,788 78,152
Revisions of previous estimates.............................................. 437 2,615
Extensions and discoveries................................................... 592 296
Production................................................................... (338) (1,643)
Purchases of minerals-in-place............................................... -- --
------ ------
Balance, March 31, 1996........................................................ 11,479 79,420
------ ------
------ ------
Proved Developed Reserves:
January 1, 1993.............................................................. 1,488 10,055
December 31, 1993............................................................ 1,785 13,268
December 31, 1994............................................................ 2,632 16,340
December 31, 1995............................................................ 8,566 57,393
March 31, 1996............................................................... 9,037 55,408
</TABLE>
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)
F-18
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
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>
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>
F-19
<PAGE>
COSTILLA ENERGY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
The 1995 future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $15.0 million of future
development costs. If these reserves are not developed, the standardized measure
of discounted future net cash flows for 1995 shown above would be reduced by
approximately $22.4 million.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1995 Acquisition (see Note 1) for the years ended December 31,
1993 and 1994, and the period ended June 12, 1995. These statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1995 Acquisition interests' revenue and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-21
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues:
Oil and condensate........................................................ $ 18,542 $ 16,217 $ 7,572
Natural gas............................................................... 13,780 11,407 3,358
--------- --------- -------
32,322 27,624 10,930
Direct operating expenses:
Lease operating........................................................... 13,376 11,220 4,550
Workovers and dry hole costs.............................................. 462 470 109
Production taxes.......................................................... 2,070 2,023 923
--------- --------- -------
15,908 13,713 5,582
--------- --------- -------
Revenues in excess of direct operating expenses............................. $ 16,414 $ 13,911 $ 5,348
--------- --------- -------
--------- --------- -------
</TABLE>
See the accompanying notes to these statements.
F-22
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 12, 1995, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.
and Parker & Parsley Producing L.P. (collectively, "Parker & Parsley") certain
oil and gas properties (the "1995 Acquisition") for $46,621,371. The
accompanying statements of revenues and direct operating expenses for the 1995
Acquisition do not include general and administrative expenses, interest income
or expense, a provision for depreciation, depletion and amortization, or any
provision for income taxes since historical expenses of this nature incurred by
Parker & Parsley are not necessarily indicative of the costs to be incurred by
the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1995 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1995
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Direct operating expenses are
recognized on the accrual method.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1995 Acquisition is based on
Company prepared reserve estimates, using prices and costs in effect at December
31, 1993 and 1994, and the period ended June 12, 1995. Changes in reserve
estimates were derived by adjusting the period-end quantities and values for
actual production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F-23
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1995 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
------------- -------------
<S> <C> <C>
Proved reserves at December 31, 1992............................... 9,880 60,199
Production......................................................... (1,204) (6,914)
------ ------
Proved reserves at December 31, 1993............................... 8,676 53,285
Production......................................................... (1,142) (6,778)
------ ------
Proved reserves at December 31, 1994............................... 7,534 46,507
Production......................................................... (479) (2,405)
------ ------
Proved reserves at June 12, 1995................................... 7,055 44,102
------ ------
------ ------
Proved developed reserves at June 12, 1995......................... 6,707 38,151
------ ------
------ ------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND
GAS RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on period-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1995 Acquisition
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994 JUNE 12, 1995
---------- ---------- -------------
<S> <C> <C> <C>
Future:
Cash inflows................................................... $ 222,698 $ 188,828 $ 191,758
Production costs............................................... (111,619) (97,988) (93,268)
Development costs.............................................. (4,797) (4,797) (4,797)
---------- ---------- -------------
Net cash flows before income taxes........................... 106,282 86,043 93,693
10% annual discount for estimated timing of cash flows........... (37,518) (30,373) (33,074)
---------- ---------- -------------
Standardized measure of discounted future net cash flows before
income taxes.................................................... $ 68,764 $ 55,670 $ 60,619
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-24
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
The following are the sources of changes in the standardized measure of
discounted net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
---------- ---------- -------------
<S> <C> <C> <C>
Standardized measure, beginning of period........................ $ 96,022 $ 68,764 $ 55,670
Sales, net of production costs................................... (16,414) (13,911) (5,348)
Net change in prices............................................. (15,892) (3,910) 8,032
Accretion of discount............................................ 9,602 6,876 2,517
Other............................................................ (4,554) (2,149) (252)
---------- ---------- -------------
Standardized measure, end of period.............................. $ 68,764 $ 55,670 $ 60,619
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1996 Acquisition (see Note 1) for the years ended December 31,
1993, 1994 and 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1996 Acquisition interests' revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1996 Acquisition for the years ended December
31, 1993, 1994 and 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-26
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED THREE-MONTH PERIODS
DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and condensate....................................... $ 11,467 $ 10,170 $ 10,564 $ 2,659 $ 2,799
Natural gas.............................................. 11,294 10,105 8,645 2,031 1,967
Gas plant................................................ 57 57 126 26 23
Transportation........................................... 39 379 556 139 298
--------- --------- --------- --------- ---------
22,857 20,711 19,891 4,855 5,087
Direct operating expenses:
Lease operating.......................................... 10,977 9,053 9,232 1,921 2,179
Workovers and dry hole costs............................. 675 869 1,002 219 247
Production taxes......................................... 1,166 1,089 992 246 250
Gas plant................................................ 131 350 598 216 148
Transportation........................................... 10 394 587 147 122
--------- --------- --------- --------- ---------
12,959 11,755 12,411 2,749 2,946
--------- --------- --------- --------- ---------
Revenues in excess of direct operating expenses............ $ 9,898 $ 8,956 $ 7,480 $ 2,106 $ 2,141
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See the accompanying notes to these statements.
F-27
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 14, 1996, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.,
Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co.
(collectively, "Parker & Parsley") certain oil and gas properties (the "1996
Acquisition") for approximately $42.5 million. The accompanying statements of
revenues and direct operating expenses for the 1996 Acquisition do not include
general and administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income taxes
since historical expenses of this nature incurred by Parker & Parsley are not
necessarily indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1996 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1996
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Direct operating expenses are
recognized on the accrual method.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
The interim financial information for the three months ended March 31, 1995
and 1996, is unaudited. However, in the opinion of management, the interim
statements of revenues and direct operating expenses include all the necessary
adjustments to fairly present the results of the interim periods and all such
adjustments are of a normal recurring nature. The interim statements of revenues
and direct operating expenses should be read in conjunction with the audited
statements of revenues and direct operating expenses for the years ended
December 31, 1993, 1994 and 1995.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1996 Acquisition, as of March
31, 1996, is based on reserve estimates prepared by Williamson Petroleum
Consultants, using prices and costs in effect at that date. Changes in reserve
estimates were derived by adjusting such quantities and values for actual
production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F-28
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1996 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
------------- -----------
<S> <C> <C>
Proved reserves at December 31, 1992.................................................... 7,211 49,963
Production.............................................................................. (718) (5,481)
----- -----------
Proved reserves at December 31, 1993.................................................... 6,493 44,482
Production.............................................................................. (685) (5,217)
----- -----------
Proved reserves at December 31, 1994.................................................... 5,808 39,265
Production.............................................................................. (656) (4,773)
----- -----------
Proved reserves at December 31, 1995.................................................... 5,152 34,492
Production.............................................................................. (154) (991)
----- -----------
Proved reserves at March 31, 1996....................................................... 4,998 33,501
----- -----------
----- -----------
Proved developed reserves at March 31, 1996............................................. 4,515 28,961
----- -----------
----- -----------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND GAS
RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on year-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1996 Acquisition
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ MARCH 31,
1993 1994 1995 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Future:
Cash inflows................................................. $ 181,010 $ 156,222 $ 165,862 $ 175,507
Production costs............................................. (116,115) (105,104) (93,878) (91,202)
Development costs............................................ (4,101) (4,101) (4,101) (4,101)
----------- ----------- ---------- ----------
Net cash flows before income taxes......................... 60,794 47,017 67,883 80,204
10% annual discount for estimated timing of cash flows......... (22,564) (17,451) (25,195) (29,768)
----------- ----------- ---------- ----------
Standardized measure of discounted future net cash flows before
income taxes.................................................. $ 38,230 $ 29,566 $ 42,688 $ 50,436
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
F-29
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
The following are the sources of changes in the standardized measure of
discounted net cash flows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Standardized measure, beginning of year........................... $ 56,372 $ 38,230 $ 29,566 $ 42,688
Sales, net of production costs.................................... (9,943) (9,264) (7,983) (2,090)
Net change in prices.............................................. (11,890) (2,838) 18,141 9,277
Accretion of discount............................................. 5,637 3,823 2,957 1,067
Other............................................................. (1,946) (385) 7 (506)
--------- --------- --------- ------------
Standardized measure, end of year................................. $ 38,230 $ 29,566 $ 42,688 $ 50,436
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-30
<PAGE>
APPENDIX A
July 23, 1996
Costilla Energy, Inc.
400 West Illinois, Suite 1000
Midland, Texas 79701
Attention Mr. Michael J. Grella
Gentlemen:
Subject: Summary Letter (for Inclusion in a Prospectus Included in a
Registration Statement for Costilla Energy, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum
Consultants, Inc. Evaluations (1) to the Interests of Costilla
Petroleum Corporation in Various Properties and (2) to the
Interests of Parker & Parsley Petroleum USA, Inc. in Various
Properties Included in Their First Quarter 1996 Sales Package
Effective April 1, 1996
Williamson Project 6.8393
In accordance with your request, Williamson Petroleum Consultants, Inc.
(Williamson) has prepared a summary letter for inclusion in a prospectus for
Costilla Energy, Inc. (Costilla). The filing of this Prospectus gives effect to
the conversion of Costilla Energy, L.L.C. to Costilla Energy, Inc. This summary
letter includes specific data from two evaluations the subjects of which are
described in Item I. All values and discussion of proved reserves and net
revenues, data utilized, assumptions, and qualifications are taken from and
include by reference data from these two evaluations.
Interests in this summary letter represent the April 1, 1996 effective date
consolidation of the ownership interests of Costilla and the ownership interests
of Parker & Parsley in various properties included in their first quarter 1996
sales package which Costilla acquired on June 14, 1996 but which was made
effective as of January 1, 1996. The Costilla interests include all the
interests of Costilla Energy, L.L.C. and all its wholly-owned subsidiaries
including Costilla Petroleum Corporation.
I. THE TWO SUBJECT EVALUATIONS
This summary letter combines certain proved oil and gas reserves and
revenues from the following two Williamson evaluations:
(1) Evaluation of Oil and Gas Reserves to the Interests of Costilla
Petroleum Corporation in Various Properties, Effective April 1, 1996,
Utilizing Nonescalated Economics, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8393, transmitted July 18, 1996
(the Costilla report)
(2) Evaluation of Oil and Gas Reserves to the Interests of Parker & Parsley
Petroleum USA, Inc. in Various Properties Included in Their First Quarter
1996 Sales Package, Effective April 1, 1996, Utilizing Nonescalated
Economics, for Disclosure to the Securities and Exchange Commission,
Williamson Project 6.8393, transmitted July 18, 1996 (the Acquisition
report)
II. ESTIMATED SEC RESERVES AND FUTURE NET REVENUES
Projections of the reserves that are attributable to the consolidated
interests in this summary letter were based on economic parameters and operating
conditions considered applicable as of April 1, 1996 and are pursuant to the
requirements of the Securities and Exchange Commission (SEC).
In accordance with instructions from Costilla, Williamson utilized lease
operating expenses for the Costilla-operated properties in the Costilla report
that excluded COPAS overhead and internal 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
A-1
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 2
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 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
- ------------------------
(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
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 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.
- ------------------------
(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
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 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.
A-4
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 5
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 (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
A-5
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 6
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.
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
A-6
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 7
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.
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
A-7
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 8
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 OFFER MADE 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 ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO 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.......................................... 9
The Company........................................... 14
Notes Offering........................................ 14
Use of Proceeds....................................... 15
Dividend Policy....................................... 15
Dilution.............................................. 16
Capitalization........................................ 17
Pro Forma Condensed Financial Statements.............. 18
Selected Financial Information........................ 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 27
Business and Properties............................... 32
Management............................................ 44
Security Ownership of Certain Beneficial Owners and
Management........................................... 47
Executive Compensation and Other Information.......... 48
Certain Transactions.................................. 50
Description of Certain Indebtedness................... 51
Description of Capital Stock.......................... 53
Shares Eligible for Future Sale....................... 56
Underwriting.......................................... 57
Legal Matters......................................... 58
Experts............................................... 58
Available Information................................. 58
Glossary.............................................. 60
Index to Financial Statements......................... F-1
Summary Reserve Report................................ A-1
</TABLE>
4,000,000 Shares
COSTILLA ENERGY, INC.
Common Stock
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
RAUSCHER PIERCE REFSNES, INC.
August , 1996
- -------------------------------------------------
-------------------------------------------------
- -------------------------------------------------
-------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 20,690
NASD filing fee.................................................... 7,860
Nasdaq listing fee................................................. *
Blue Sky fees and expenses......................................... 15,000
Accounting fees and expenses....................................... *
Engineering fees and expenses...................................... *
Transfer Agent fees and expenses................................... *
Legal fees and expenses............................................ *
Printing and mailing expenses...................................... *
Miscellaneous......................................................
---------
TOTAL........................................................
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify certain persons, including officers and directors and
former officers and directors, and to purchase insurance with respect to
liability arising out of their capacity or status as officers and directors.
Such law provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which officers and directors may
be entitled under the corporation's bylaws, any agreement or otherwise. Article
IX of the Company's Certificate of Incorporation, included in Exhibit 3.1
hereto, and Article VI of the Company's Bylaws, included in Exhibit 3.2 hereto,
provide, in general, that the Company shall indemnify its directors and officers
under the circumstances defined in Section 145 of the General Corporation Law of
the State of Delaware and gives authority to the Company to purchase insurance
with respect to such indemnification. The Company may in the future seek to
obtain insurance providing for indemnification of officers and directors of the
Company and certain other persons against liabilities and expenses incurred by
any of them in certain stated proceedings and under certain stated conditions.
In addition, Section 102(b)(7) of the General Corporation Law of the State
of Delaware permits a corporation to limit the liability of its directors
subject to certain exceptions. In accordance with Section 102(b)(7), Article VI
of the Company's Certificate of Incorporation, included in Exhibit 3.1 hereto,
provides, in general, that no director of the Company shall be personally liable
for (i) any breach of the directors' duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the General Corporation Law of the State of Delaware or (iv) any
transaction from which the director derived an improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, 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 Offerings, the Company issued an aggregate
of 300 shares of Common Stock to Messrs. Liedtke, Grella and Musselman in its
initial capitalization, which shares were cancelled in connection with the
Corporate Reorganization, and an aggregate of 6,000,000 shares of Common Stock
to the four members of the LLC in the merger of the LLC with and into the
Company. Such shares were not registered under the Securities Act in reliance
upon the exemption from registration provided by Section 4(2) thereof.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- --------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
***3.1 Certificate of Incorporation of the Company
***3.2 Bylaws of the Company
***4.1 Form of Notes or Global Certificate (included as Exhibit A to the form of Indenture
filed as Exhibit Number 4.2 to the Registration Statement on Form S-1, File No.
333- , filed with respect to the Notes)
***4.2 Form of Indenture
**4.3 Form of Stock Certificate
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**6.1 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley
Development L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas
Processing Co. as Seller and Costilla Petroleum Corporation and Costilla Energy,
L.L.C. as Purchaser
**6.2 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley
Development L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas
Processing Co. as Seller and Costilla Petroleum Corporation and Costilla Energy,
L.L.C. as Purchaser
**10.1 Form of Credit Agreement to be entered into contemporaneously with the closing of the
Offerings between the Company as Borrower and as Lender.
***10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla
Energy, L.L.C.
***10.3 Concession Agreement dated July 6, 1995 between the Government of the Republic of
Moldova and the Resource Development Company, Limited.
***10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company
and Resources Development Limited, L.L.C. (DE).
**10.5 Consolidation Agreement to be effective contemporaneously with closing of the
Offerings to consummate the Corporate Reorganization.
**10.6 1996 Stock Option Plan.
**10.7 Outside Directors Stock Option Plan.
***10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996.
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings.
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings.
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings.
***10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and
Koch Oil Company.
***10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier
Oil and Refining Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- --------------------------------------------------------------------------------------
<C> <S>
***12.1 Computation of Ratio of EBITDA to Interest Expense
***12.2 Computation of Ratio of Earnings to Fixed Charges
***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
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Incorporated by reference to Registration Statement on Form S-1, File No.
333- , filed with respect to the Notes
(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.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunder duly authorized in the City of Midland, State of Texas,
on July 25, 1996.
COSTILLA ENERGY, INC.
(Registrant)
By: *
-----------------------------------
Michael J. Grella
PRESIDENT AND CHIEF OPERATING
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
* Chairman of the Board,
- ----------------------------------- Chief Executive Officer July 25, 1996
Cadell S. Liedtke and Director
* President, Chief
- ----------------------------------- Operating Officer and July 25, 1996
Michael J. Grella Director
*
- ----------------------------------- Executive Vice President July 25, 1996
Henry G. Musselman and Director
/s/ BOBBY W. PAGE Senior Vice Present,
- ----------------------------------- Treasurer and Chief July 25, 1996
Bobby W. Page Financial Officer
*
- ----------------------------------- Director July 25, 1996
Jerry J. Langdon
*
- ----------------------------------- Director July 25, 1996
W.D. Kennedy
*By: /s/ BOBBY W. PAGE
- -----------------------------------
Bobby W. Page
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
*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 Number 4.2 to the Registration Statement on Form S-1, File No.
333- , filed with respect to the Notes)
***4.2 Form of Indenture
**4.3 Form of Stock Certificate
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**6.1 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley
Development L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas
Processing Co. as Seller and Costilla Petroleum Corporation and Costilla Energy, L.L.C.
as Purchaser
**6.2 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley
Development L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas
Processing Co. as Seller and Costilla Petroleum Corporation and Costilla Energy, L.L.C.
as Purchaser
**10.1 Form of Credit Agreement to be entered into contemporaneously with the closing of the
Offerings between the Company as Borrower and as Lender.
***10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla
Energy, L.L.C.
***10.3 Concession Agreement dated July 6, 1995 between the Government of the Republic of
Moldova and the Resource Development Company, Limited.
***10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company and
Resources Development Limited, L.L.C. (DE).
**10.5 Consolidation Agreement to be effective contemporaneously with closing of the Offerings
to consummate the Corporate Reorganization.
**10.6 1996 Stock Option Plan.
**10.7 Outside Directors Stock Option Plan.
***10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996.
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings.
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings.
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings.
***10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and Koch
Oil Company.
***10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier Oil
and Refining Company.
***12.1 Computation of Ratio of EBITDA to Interest Expense
***12.2 Computation of Ratio of Earnings to Fixed Charges
***21.1 Subsidiaries of the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
*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
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Incorporated by reference to Registration Statement on Form S-1, File No.
333- , filed with respect to the Notes
<PAGE>
[Draft of July 25, 1996]
Costilla Energy, Inc.
4,000,000 Shares
Common Stock
UNDERWRITING AGREEMENT
_________ ___, 1996
PRUDENTIAL SECURITIES INCORPORATED
RAUSCHER PIERCE REFSNES, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Costilla Energy, Inc., a Delaware corporation (the "Company"), hereby
confirms its agreement with the several underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth
below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be to the Underwriters.
It is understood and agreed to by all parties hereof that, prior to or
concurrently with the Firm Closing Date (as hereinafter defined), the Company
will issue in a public offering $100 million principal of its Notes (the
"Notes Offering").
1. SECURITIES. Subject to the terms and conditions herein contained, the
Company agrees to issue and sell to the several Underwriters an aggregate of
4,000,000 shares (the "Firm Securities") of the Company's Common Stock, par
value $.10 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than 600,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities".
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company and each
of the subsidiaries of the Company appearing on the signature pages hereof (the
"Subsidiary Guarantors") represents and warrants to, and agrees with, each of
the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-________) with
respect to the Securities (i) has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder,
(ii) has been filed with the Commission under the Act and (iii) either has
become effective under the Act and is not proposed to be amended or is
proposed to be amended by amendment or post-effective amendment. If the
Company does not propose to amend such registration statement and if any
post-effective amendment to such registration statement has been filed with
the Commission prior to the execution and delivery of this Agreement, the
most recent such amendment has been declared effective by the Commission.
Copies of such registration statement as amended to date have been
delivered by the Company to you. For purposes of this Agreement,
"Effective Time" means the date and the time as of which such registration
statement, or the most recent post-effective amendment thereto, if any, was
declared effective by the Commission; "Effective Date" means the date of
the Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereof, before it became
effective under the Act and any prospectus filed with the Commission by the
Company with the consent of the Underwriters pursuant to Rule 424(a) of the
Rules and Regulations prior to the filing of the Prospectus; "Registration
Statement" means such registration statement, as amended at the Effective
Time, including any documents incorporated by reference therein and, if the
Effective Date is on or before the date of this Agreement, all information
contained in the final prospectus filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations ("Rule 424(b)") in accordance with
Section 5(a) hereof and deemed to be a part thereof as of the Effective
Time pursuant to the Rules and Regulations and any Rule 462(b) Registration
Statement (as hereinafter defined); "Prospectus" means the form of
prospectus relating to the Securities, as first used to confirm sales of
the Shares; and "described in the Prospectus" or "disclosed in the
Prospectus" means described or disclosed, as applicable, in the Prospectus;
"Rule 462(b) Registration Statement" means any registration statement filed
with the Commission pursuant to Rule 462(b) under the Act (including the
Registration Statement and any Preliminary Prospectus or Prospectus
incorporated therein at the time such Registration Statement becomes
effective). The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus.
(b) At the Effective Time and at all times subsequent thereto up to
the Closing Date (as hereinafter defined), the Registration Statement and
the Prospectus, and any amendments or supplements thereto, conform in all
material respects with the requirements of the Act and the Rules and
Regulations, and at the Effective Time the Registration Statement did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented at the Closing Date, if applicable, did not contain any untrue
statement of a material fact or omit to state a material fact necessary to
-2-
<PAGE>
make the statements contained therein, in the light of the circumstances
under which they were made, not misleading; except that the foregoing does
not apply to statements or omissions in the Registration Statement or the
Prospectus, as amended or supplemented if applicable, based upon written
information furnished to the Company by any Underwriter through you
specifically for use therein.
(c) The consolidated financial statements included in the
Registration Statement and Prospectus present fairly the consolidated
financial position of the Company and its consolidated subsidiaries as at
the dates indicated and the results of their operations and the changes in
their consolidated financial position for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis during the
periods involved, except as indicated therein; and the supporting schedules
included in the Registration Statement present fairly the information
required to be stated therein. The pro forma financial statements set
forth in the Registration Statement and the Prospectus (the "pro forma
financial statements") have been prepared in accordance with the applicable
accounting requirements of Rule 11-02 of Regulation S-X; the pro forma
adjustments reflected in the pro forma financial statements have been
properly applied to the historical amounts in the compilation of such
statements; and the assumptions used in the preparation of the pro forma
financial statements are, in the opinion of the Company, reasonable.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (i) there has not been and will not have been any change in the
capitalization of the Company, or any material adverse change in the
condition, financial or otherwise, earnings, affairs or business prospects
of the Company and its subsidiaries considered as a whole, whether or not
arising in the ordinary course of business, (ii) there have been no
material transactions entered into by the Company or any of its
subsidiaries other than those in the ordinary course of business, (iii) the
Company has not issued or granted any securities, and (iv) the Company has
not and will not have paid or declared any dividends or other distributions
of any kind on any class of its capital stock.
(e) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; and the
Company is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which it owns or leases
properties or in which the conduct of its business requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries considered as a whole.
(f) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation or
limited liability company in good standing under the laws of the
jurisdiction of its formation, has corporate power and authority to own,
lease and operate its properties and conduct its business as described in
the
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Registration Statement and is duly qualified as a foreign corporation
or limited liability company to transact business and is in good standing
in each jurisdiction in which it owns or leases properties or in which the
conduct of its business requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries considered as a
whole; all of the issued and outstanding capital stock or other equity
interest of each subsidiary has been duly authorized and validly issued and
is fully paid and nonassessable, and all such capital stock or other equity
interest of each subsidiary is owned by the Company, directly or through
subsidiaries, free and clear of any mortgage, pledge, lien, encumbrance,
claim or equity and, except as disclosed in the Prospectus, neither the
Company nor any such subsidiary owns any shares of stock or any other
equity securities of any corporation or has any equity interest in any
firm, partnership, association or other entity.
(g) Neither the Company nor any of its subsidiaries is (i) in
violation of its or any of their charters or by-laws or other
organizational documents or (ii) in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which it or any of them is a party or by which it or any of
them or their properties may be bound except to the extent that such
default would not have a material adverse effect on the Company and its
subsidiaries considered as a whole; no consent, approval, authorization or
order of any court or governmental authority or agency is required for the
consummation by the Company of the transactions contemplated by this
Agreement, except such as may be required under the Act, the Rules and
Regulations or state securities or Blue Sky laws; and the execution and
delivery of this Agreement and the consummation of the transactions
contemplated herein and the application of the net proceeds from the
offering and sale of the Securities in the manner set forth in the
Prospectus under "Use of Proceeds" will not conflict with or constitute a
breach of, or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any of them
may be bound or to which any of the property or assets of the Company or
any of its subsidiaries is subject, nor will such action result in any
violation of or conflict with the provisions of the charter or by-laws of
the Company or any law, administrative regulation or administrative or
court decree.
(h) The Company and its subsidiaries possess adequate certificates,
authorities, licenses or permits issued by the appropriate state, federal
or foreign regulatory agencies or bodies necessary to conduct the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authority, license or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the condition,
financial or otherwise, earnings, affairs or business prospects of the
Company and its subsidiaries considered as a whole.
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(i) Except as set forth in the Prospectus, there is no action, suit
or proceeding before or by any court or governmental agency or body,
domestic or foreign, now pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its subsidiaries,
which might result in any material adverse change in the condition,
financial or otherwise, earnings, affairs or business prospects of the
Company and its subsidiaries considered as a whole, or might materially and
adversely affect the properties or assets thereof or might materially and
adversely affect the offering of the Securities; and there are no material
contracts or other documents which are required to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations which
have not been so filed.
(j) The Company and each of its subsidiaries has good and defensible
title to all property and assets owned by it and necessary in the conduct
of the business of the Company or such subsidiary in each case free and
clear of all liens, encumbrances and defects except (i) such as are
referred to in the Prospectus or (ii) such as do not materially adversely
affect the value of such property to the Company or such subsidiary, and do
not interfere with the use made and proposed to be made of such property by
the Company or such subsidiary to an extent that such interference would
have a material adverse effect on the Company or such subsidiary.
(k) This Agreement has been duly authorized, executed and delivered
by the Company and each of the Subsidiary Guarantors and is a valid and
binding agreement of the Company and each of the Subsidiary Guarantors
(subject, as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting creditors'
rights generally from time to time in effect and to general equitable
principles), except as rights to indemnity hereunder may be limited by
applicable law.
(l) The outstanding shares of Common Stock have been, and the
Securities to be issued and sold by the Company upon such issuance as
provided herein will be, duly authorized, validly issued, fully paid and
nonassessable, and will not be subject to any preemptive or similar right.
The description of the Common Stock in the Registration Statement and the
Prospectus is, and at the Closing Date will be, complete and accurate in
all respects. Except as set forth in the Prospectus, the Company does not
have outstanding, and at the Closing Date will not have outstanding, any
options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, any shares of Common Stock, any shares of capital stock
or other equity interest of any subsidiary or any such warrants,
convertible securities or obligations.
(m) Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated by this Agreement gives rise to
any rights, other than those which have been duly waived or satisfied and
those pursuant to Article XI of the Regulations of Costilla Energy, L.L.C.,
for or relating to the registration of any securities of the Company. The
pro forma capitalization of the Company as of the date of the most recent
balance sheet included in the Prospectus is as set forth in the Prospectus.
The Company has all requisite
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corporate power and authority to issue, sell, and deliver the Securities
in accordance with and upon the terms and conditions set forth in this
Agreement and in the Registration Statement and Prospectus. All
corporate action required to be taken by the Company for the
authorization, issuance, sale and delivery of the Securities to be sold
by the Company hereunder has been validly and sufficiently taken.
(n) The Securities are duly authorized for listing, subject to
official notice of issuance, on the Nasdaq National Market.
(o) KPMG Peat Marwick, LLP and Elms, Faris & Co., P.C., who have
certified certain financial statements of the Company and its subsidiaries,
are independent public accountants within the meaning of the Securities Act
and the rules and regulations thereunder.
(p) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(q) The Company and its subsidiaries own or otherwise possess the
right to use all patents, trademarks, service marks, trade names and
copyrights, all applications and registrations for each of the foregoing,
and all other proprietary rights and confidential information used in the
conduct of their respective businesses as currently conducted; and neither
the Company nor any of its subsidiaries has received any notice or is
otherwise aware, of any infringement of or conflict with the rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse effect on the Company.
(r) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries have been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries have any reason to believe that they
will not be able to renew their existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have
a material adverse effect on the Company.
(s) The Company has complied and will comply with all the provisions
of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) and
all regulations promulgated thereunder relating to issuers doing business
in Cuba.
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<PAGE>
(t) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
described in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by the Rules
and Regulations.
(u) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of
its subsidiaries (or, to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company or its subsidiaries in violation
of any applicable law, ordinance, rule, regulation, order, judgment, decree
or permit, or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; there has been no material
spill, discharge, leak, emission, injection, escape, dumping or release of
any kind onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes, hazardous
wastes or hazardous substances due to or caused by the Company or any of
its subsidiaries or with respect to which the Company or any of its
subsidiaries have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or
would not be reasonably likely to have, singularly or in the aggregate with
all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a material adverse effect on the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and the terms "hazardous
wastes," "toxic wastes," "hazardous substances" and "medical wastes" shall
have the meanings specified in any applicable local, state, federal and
foreign laws or regulations with respect to environmental protection.
(v) If the Company has elected to rely on Rule 462(b) under the Act
and the Rule 462(b) Registration Statement has not been declared effective
(i) the Company has filed a Rule 462(b) Registration Statement in
compliance with and that is effective upon filing pursuant to Rule 462(b)
and has received confirmation of its receipt and (ii) the Company has given
irrevocable instructions for transmission of the applicable filing fee in
connection with the filing of the Rule 462(b) Registration Statement, in
compliance with Rule 111 promulgated under the Act or the Commission has
received payment of such filing fee.
(w) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Securities or (ii) since the filing of the Registration Statement
(A) sold, bid for, purchased, or paid anyone any compensation for
soliciting
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<PAGE>
purchases of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Company.
(x) The Company has not distributed and, prior to the later of (i)
the Closing Date and (ii) the completion of the distribution of the shares,
will not distribute any offering material in connection with the offering
and sale of the shares other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or other materials, if any, permitted by
the Act.
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. (a) On the basis of
the representations, warranties, agreements and covenants herein contained
and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $____ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1
hereto. One or more certificates in definitive form for the Firm
Securities that the several Underwriters have agreed to purchase hereunder,
and in such denomination or denominations and registered in such name or
names as the Representatives request upon notice to the Company at least 48
hours prior to the Firm Closing Date, shall be delivered by or on behalf of
the Company to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired
Funds") to the account of the Company. Such delivery of and payment for
the Firm Securities shall be made at the offices of Baker & Botts, L.L.P.
("Counsel for the Underwriters"), One Shell Plaza, 910 Louisiana, Houston,
Texas 77002, at 10:00 a.m., Houston time, on the fourth full business day
following the date of this Agreement or at such other place, time or date
as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, such time and
date of deliver against payment being herein referred to as the "Firm
Closing Date". The Company will make such certificate or certificates for
the Firm Securities available for checking and packaging by the
Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at
least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by
the Prospectus, the Company hereby grant to the several Underwriters an
option to purchase, severally and not jointly, the Option Securities The
purchase price to be paid for any Option Securities shall be the same price
per share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3. The option granted hereby may be
exercised as to all or any part of the Option Securities from time to time
within 30 days after the date of the Prospectus (or, if such 30th day shall
be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange is open for trading). The Underwriters
shall not be under an obligation to purchase any of the Option Securities
prior to the exercise of such option. The Representatives may from time to
time exercise the option granted hereby by giving notice in writing or by
telephone (confirmed in writing) to the Company setting forth
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<PAGE>
the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Securities. Any such date of
delivery shall be determined by the Representatives but shall not be
earlier than two business days or later than five business days after
such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or
such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with
respect to such Option Securities, and the Firm Closing Date and the
Option Closing Date are sometimes each referred to herein as a "Closing
Date." Upon exercise of the option as provided herein, the Company
shall become obligated to sell to each of the several Underwriters, and,
subject to the terms and conditions herein set forth, each of the
Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of
the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of
the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid
fractional shares. If the option is exercised as to all or any portion
of the Option Securities, one or more certificates in definitive form
for such Option Securities, and payment therefor, shall be delivered on
the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in paragraph (a) of this Section 3, except that
reference therein to the Firm Securities and the Firm Closing Date shall
be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does
not constitute closing of a purchase and sale of the Securities. Only
execution and delivery of a receipt for Securities by the Underwriters
indicates completion of the closing of a purchase of the Securities from
the Company. Furthermore, in the event that the Underwriters wire funds to
the Company prior to the completion of the closing of a purchase of
Securities, the Company hereby acknowledges that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or
otherwise, the Company will not be entitled to the wired funds and shall
return the wired funds to the Underwriters as soon as practicable (by wire
transfer of same-day funds) upon demand. In the event that the closing of
a purchase of Securities is not completed and the wire funds are not
returned by the Company to the Underwriters on the same day the wired funds
were received by the Company, the Company agrees to pay to the Underwriters
in respect of each day the wire funds are not returned by it, in same-day
funds, interest on the amount of such wire funds in an amount representing
the Underwriters' cost of financing as reasonably determined by Prudential
Securities Incorporated.
(d) It is understood that either of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their
obligation hereunder.
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<PAGE>
4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and
any amendments thereto to become effective as promptly as possible. If
required, the Company will file the Prospectus that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under
the Act. During any time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company (i) will comply with
all requirements imposed upon it by the Act and the rules and regulations
of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with
the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus or
the amendment referred to in Section 2(a) hereof, any amendment or
supplement to such Prospectus or any amendment to the Registration
Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have been advised and furnished with a copy for
a reasonable period of time prior to the proposed filing and as to which
filing the Representatives shall not have given their consent. The Company
will prepare and file with the Commission, in accordance with the Rules and
Regulations, promptly upon request by the Representatives or counsel for
the Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Securities by the
several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when
the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto
has been filed and will provide evidence satisfactory to the
Representatives of each such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose or (iv) any request
made by the Commission for amending the Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus
or for additional information. The Company will use its best efforts to
prevent the issuance of any
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<PAGE>
such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, PROVIDED, HOWEVER, that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary
at any time to amend or supplement the Prospectus to comply with the Act or
the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section 5(a)
hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or
effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto), (ii) to
each other Underwriter, a conformed copy of such registration statement or
any Rule 462(b) Registration Statement and each amendment thereto (in each
case without exhibits thereto) and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies
of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 6:00 P.M., New York City time, on the date of determination
of the public offering price, if such determination occurred at or prior to
10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York
City time, on the business day following the date of determination of the
public offering price, if such determination occurred after 10:00 A.M., New
York City time, on such date, will deliver to the Underwriters, without
charge, as many copies of the Prospectus and any amendment or supplement
thereto as the Representatives may reasonably request for purposes of
confirming orders that are expected to settle on the Firm Closing Date.
The Company will provide or cause to be provided to each of the
Representatives, and to each Underwriter that so requests in writing, a
copy of each report on Form SR filed by the Company as required by Rule 463
under the Act.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a consolidated
earnings statement of the Company
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<PAGE>
and its subsidiaries that satisfies the provisions of Section 11(a) of the
Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, and will cause
its stockholders, directors and officers to not, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 180 days after the date hereof, except
pursuant to this Agreement and except for the grant of options pursuant to
the Company's employee stock option plans described in the Prospectus and
the exercise and/or sale of Common Stock by nonaffiliates of the Company
acquired pursuant to the exercise of such options.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (B) pay or
agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Securities by the Selling Securityholders under this Agreement).
(j) The Company will obtain the agreements described in Section 7(f)
hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date,
any rumor, publication or event relating to or affecting the Company shall
occur as a result of which in your opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you
advising the Company to the effect set forth above, forthwith prepare,
consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(l) The Company will use its best efforts to cause the Securities to
be duly included for quotation on the Nasdaq Stock Market's National Market
(the "Nasdaq National Market") prior to the Firm Closing Date. The Company
will ensure that the Securities remain included for quotation on the Nasdaq
National Market following the Firm Closing Date.
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<PAGE>
(m) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with
Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern
time on the date of this Agreement and (ii) the time confirmations are sent
or given, as specified by Rule 462(b)(2).
6. EXPENSES. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement (including financial
statements and exhibits), any Rule 462(b) Registration Statement, the
Prospectus, each preliminary prospectus and all amendments and supplements to
any of them prior to or during the period specified in Section 5(b) (including,
without limitation, the deliveries thereof pursuant to Section 5(d)), this
Agreement and any blue sky memoranda, (ii) all arrangements relating to the
delivery to the Underwriters of copies of the foregoing documents, (iii) the
fees and disbursements of the counsel, the accountants and any other experts or
advisors retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (vii) any quotation of the Securities on the Nasdaq
National Market and, (viii) any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters). If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 7 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 11 hereof or because of
any failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all out-of-
pocket expenses (including reasonable counsel fees and disbursements) that
shall have been incurred by them in connection with the proposed purchase and
sale of the Securities. The Company shall not in any event be liable to any
of the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective (or if a
post-effective amendment is required to be filed under the Act, such
post-effective amendment shall have become effective) not later than 5:00
p.m., New York time, on the date of this Agreement,
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and, if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not
later than the earlier of (i) 11:00 A.M., New York City time, on the
date on which the amendment to the registration statement originally
filed with respect to the Securities or to the Registration Statement,
as the case may be, containing information regarding the initial public
offering price of the Securities has been filed with the Commission and
(ii) the time confirmations are sent or given as specified by Rule
462(b)(2), or with respect to the Registration Statement, or such later
time or date as shall have been consented to by you; and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted, or to the knowledge of the Company or you, shall be
contemplated by the Commission.
(b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Cotton, Bledsoe, Tighe & Dawson, a Professional
Corporation ("Counsel for the Company"), to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware
with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement; and the Company is duly qualified as a foreign corporation
to transact business and, to the best of such counsel's knowledge and
information, is in good standing in each jurisdiction which requires
such qualification wherein it owns or leases properties or conducts
business, except where the failure to so qualify would not have a
material adverse effect on the properties, prospects, condition
(financial or otherwise) or results of operations of the Company
and its subsidiaries taken as a whole.
(ii) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation or
limited liability company in good standing under the laws of the
jurisdiction of its formation, has corporate power and authority to
own, lease and operate its properties and conduct its business as
described in the Registration Statement, and, to the best of such
counsel's knowledge and information, is duly qualified as a foreign
corporation or limited liability company to transact business and is
in good standing in each jurisdiction which requires such
qualification wherein it owns or leases properties or conducts
business, except where the failure to so qualify would not have a
material adverse effect on the properties, prospects, condition
(financial or otherwise) or results of operations of the Company
and its subsidiaries taken as a whole; all of the issued and
outstanding capital stock or other equity interest of each subsidiary
has been duly authorized and validly issued and is fully paid and
non-assessable, and, except as otherwise set forth in the Registration
Statement, all of such capital stock or other equity interest, to the
best of such counsel's knowledge and information, is owned by the
Company, directly or indirectly, free and clear of any mortgage,
pledge, lien, encumbrance, claim or equity.
(iii) All of the outstanding shares of capital stock of the
Company have been duly authorized and are validly issued, fully paid
and nonassessable. To the
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best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities
as contemplated by this Agreement gives rise to any rights, other
than those which have been waived or satisfied and those pursuant
to Article XI of the Regulations of Costilla Energy, L.L.C., for or
relating to the registration of any securities of the Company or
any of its subsidiaries, and, to the best of such counsel's
knowledge, no person or entity (other than the Underwriters) has
the right, contractual or otherwise, to cause the Company to sell
or otherwise issue to such person or entity, or permit such person
or entity to underwrite the sale of, any of the Securities. The
authorized equity capitalization of the Company as of the date of
the most recent balance sheet included or incorporated by reference
in the Prospectus is as set forth in the Prospectus, and the
Securities conform as to legal matters to the description thereof
contained in the Prospectus. The Company has all requisite
corporate power and authority to issue, sell and deliver the
Securities in accordance with and upon the terms and conditions set
forth in this Agreement and in the Registration Statement and
Prospectus and upon delivery of the Securities against payment
therefor in accordance with this Agreement, the Securities will be
validly issued, fully paid and nonassessable.
(iv) There are no preemptive or other rights to subscribe for or
to purchase, nor any restriction upon the voting or transfer of, any
of the Securities.
(v) This Agreement has been duly authorized, executed and
delivered by the Company and the Subsidiary Guarantors.
(vi) The Registration Statement is effective under the Act and,
to the best of such counsel's knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been
issued under the Act or proceedings therefor initiated or threatened
by the Commission. All required filings by the Company under Rule
424(b) of the Rules and Regulations have been timely made.
(vii) Statements set forth in the Prospectus under the
headings "Business and Properties--Regulation" and "Description of
Capital Stock," in the Registration Statement, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein fairly present the information called
for with respect to such legal matters, documents and proceedings.
(viii) No consent, approval, authorization or order of any
court or governmental authority or agency is required in connection
with the transactions contemplated by this Agreement, except such as
may be required under the Act, the Rules and Regulations or state
securities or Blue Sky laws and such other approvals (specified in
such opinion) as have been obtained; and, to the best of such
counsel's knowledge and information, the execution and delivery of
this Agreement, the issue and sale of the Securities being delivered
on such Closing Date by the Company and the compliance by the Company
with all of the provisions of this Agreement and the
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consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any
of them may be bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject; nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company, or any law, administrative regulation or
administrative or court decree.
(ix) After due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of the
properties of the Company is subject that is required to be described
in the Registration Statement or the Prospectus and is not so
described or of any contract or other document that is required to be
described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement that is not so
described or filed as required.
(x) The Registration Statement, any Rule 462(b) Registration
Statement and the Prospectus and any further amendments or supplements
thereto made by the Company at the time the Registration Statement and
each amendment thereto became effective (except that no opinion need
be expressed as to the financial statements or notes thereto and other
financial and statistical data contained therein) complied as to form
in all material respects with the applicable requirements of the Act
and the Rules and Regulations.
Such opinion shall also contain a statement that such counsel has no
reason to believe that (i) the Registration Statement, as of the Effective
Time, or any amendment thereto (other than the engineering data, financial
statements and notes thereto and the other engineering, financial and
statistical data contained therein, as to which such counsel need not
comment), at the time it became effective, contained any untrue statement
of a material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, or (ii) the Prospectus or any supplement or amendment thereto
(other than the engineering data, financial statements and notes thereto
and the other engineering, financial and statistical data contained
therein, as to which such counsel need not comment), on the Firm Closing
Date or at the time such Prospectus or supplement or amendment thereto was
issued contains or contained any untrue statement of a material fact or
omits or omitted to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Counsel for the Underwriters, with respect to the
issuance and sale of the Firm Securities, the Registration Statement and
the Prospectus, and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such
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counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters. In rendering such opinion,
such counsel may rely as to all matters of law upon the opinion of
Counsel for the Company referred to in paragraph (b) above.
(d) The Representatives shall have received from KPMG Peat Marwick,
LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to
the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the
Act and the applicable Rules and Regulations;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial statements examined
by them and included in the Registration Statement and the Prospectus
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries, carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (iii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of the Company and each of its consolidated subsidiaries, and
inquiries of certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to believe
that:
(A) the unaudited consolidated condensed financial
statements of the Company and its consolidated subsidiaries included
in the Registration Statement and the Prospectus do not comply in form
in all material respects with the applicable accounting requirements
of the Act and the Rules and Regulations or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus; or
(B) at a specified date not more than five days prior to the
date of such letters, there was any change in the consolidated capital
stock or any increase in consolidated long-term debt of the Company
and its subsidiaries or any decrease in the consolidated net current
assets or members' capital of the Company and its subsidiaries or any
increases or decreases in any other items specified by the
Underwriters, in each case as compared with the amounts shown on the
most recent balance sheet of the Company and its subsidiaries included
or incorporated by reference in the Registration Statement and
Prospectus or, during the period from the
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date of such balance sheet to a specified date not more than five
days prior to the date of such letters, there were any decreases,
as compared with the corresponding period in the preceding year, in
consolidated net revenues or the total or per share amounts of
consolidated net income of the Company and its subsidiaries or any
increases or decreases in any other items specified by the
Underwriters, except in each such case as set forth in or
contemplated by the Registration Statement and Prospectus or except
for such exceptions enumerated in such letters as shall have been
agreed to by the Underwriters and the Company;
(iv) In addition to the examination referred to in their report
included or incorporated by reference in the Registration Statement
and the Prospectus, and the specified procedures referred to in clause
(iii) above, they have carried out certain other specified procedures,
not constituting an audit, with respect to certain amounts,
percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by the
Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting and
financial records of the Company and its subsidiaries identified in
such letters; and
(v) on the basis of a reading of the unaudited pro forma
consolidated condensed financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(v), inquiries of certain officials of the Company and its
consolidated subsidiaries and Parker & Parsley Development L.P. who
have responsibility for financial and accounting matters and proving
the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited pro forma
consolidated condensed financial statements, nothing came to their
attention that caused them to believe that the unaudited pro forma
consolidated condensed financial statements do not comply in form in
all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X or that the pro forma adjustments have
not been properly applied to the historical amounts in the compilation
of such statements.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied
by a written explanation of the Company as to the significance thereof,
unless the Representatives deem such explanation unnecessary, and (B) such
changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impractical or inadvisable to proceed with the
purchase and delivery of the Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
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(e) You shall have received a certificate, dated the Firm Closing
Date of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(f) You shall have received from each person who is an officer of the
Company or who owns more than __% of the outstanding shares of Common Stock
an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 180 days after
the date of this Agreement.
(g) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from
the Company.
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<PAGE>
(h) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National
Market.
(i) On or prior to the Firm Closing Date, the closing contemplated
pursuant to the Notes Offering shall have occurred.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. INDEMNIFICATION AND CONTRIBUTION. (a) Each of the Company and the
Subsidiary Guarantors, jointly and severally, agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films or tape recordings,
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and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that
neither the Company nor the Subsidiary Guarantors will be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto or any Application in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for
use therein; and PROVIDED, FURTHER, that the neither Company nor the
Subsidiary Guarantors will be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the
Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended
or supplemented) at or prior to the written confirmation of the sale of
such Securities to such person in any case where such delivery of the
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result
of noncompliance by the Company with Sections 5(b) or 5(d) of this
Agreement. This indemnity agreement will be in addition to any liability
which the Company may otherwise have. The Company will not, without the
prior written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of
such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of the Subsidiary Guarantors, each of the
directors of the Company, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company, such
Subsidiary Guarantor, or any such director, officer or controlling person
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
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Application or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for
use therein; and, subject to the limitation set forth immediately preceding
this clause, will reimburse, as incurred, any legal or other expenses
reasonably incurred by the Company, such Subsidiary Guarantor, or any such
director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party; PROVIDED, HOWEVER,
that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying
party shall not have the right to direct the defense of such action on
behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such
action on behalf of such indemnified party or parties. After notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of
counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the preceding sentence (it being understood,
however, that in connection with such action the indemnifying party shall
not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case
of paragraph (a) of this Section 8, representing the indemnified parties
under such paragraph (a) who are parties to such action or actions) or (ii)
the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs
and expenses of any settlement
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of such action effected by such indemnified party without the consent of
the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party or parties on the other
from the offering of the Securities or (ii) if the allocation provided by
the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party or parties on the other
in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Subsidiary Guarantors on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters.
The relative fault of the parties shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters, the
parties' relative intents, knowledge, access to information and opportunity
to correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (d). Notwithstanding
any other provision of this paragraph (d), no Underwriter shall be
obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or
any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph (d), each
person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement and each
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person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company.
9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangement satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters
as described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for it default.
10. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and the
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. TERMINATION. (a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing
Date or the related Option Closing Date, respectively, in the event that
the Company shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or
satisfied hereunder at or prior thereto or, if at or prior to the Firm
Closing Date or such Option Closing Date, respectively,
-24-
<PAGE>
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material lose or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or
any development involving a prospective material adverse change
(including without limitation a change in management or control of the
Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on either such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall
be without liability of any party to any other party except as provided in
Section 10 hereof.
12. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in
the last paragraph on the front cover page and under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by any Underwriter through the Representatives to the Company for
the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm that
such statements (to such extent) are correct.
13. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company
at Costilla Energy, Inc.,
-25-
<PAGE>
400 West Illinois, Suite 1000, Midland, Texas 79701, to the attention of the
Secretary with copy to the President.
14. SUCCESSORS. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnities of the Company and the Subsidiary Guarantors
contained in Section 8 of this Agreement shall also be for the benefit of any
person or persons who control any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of
the Underwriters contained in Section 8 of this Agreement shall also be for
the benefit of the directors of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from an Underwriter shall be deemed
a successor because of such purchase.
15. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the term and conditions set forth herein, shall be governed by and
construed in accordance with the law of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-26-
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
each of the several Underwriters.
Very truly yours,
COSTILLA ENERGY, INC.
By:
------------------------------------
Name:
Title:
[SUBSIDIARY GUARANTORS]
By:
------------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
RAUSCHER PIERCE REFSNES, INC.
By PRUDENTIAL SECURITIES INCORPORATED
By:
------------------------------------
Name:
Title:
For itself and on behalf of the Representatives.
-27-
<PAGE>
SCHEDULE 1
UNDERWRITERS
NUMBER OF FIRM
SECURITIES TO
UNDERWRITER BE PURCHASED
- ----------- --------------
Prudential Securities Incorporated............
Rauscher Pierce Refsnes, Inc. ................
Total.......................... --------------
-28-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Midland, Texas
July 26, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
As independent engineering consultants, we hereby consent to the use of our
Summary Reserve Report entitled "Summary Letter (for Inclusion in a Prospectus
Included in a Registration Statement for Costilla Energy, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum Consultants, Inc.
Evaluations (1) to the Interests of Costilla Petroleum Corporation in Various
Properties and (2) to the Interests of Parker & Parsley Petroleum USA, Inc. in
Various Properties Included in Their First Quarter 1996 Sales Package, Effective
April 1, 1996, Williamson Project 6.8393" dated July 23, 1996 prepared for
Costilla Energy, Inc., and data extracted therefrom (and all references to our
Firm, including any references as Experts) included in or made part of the
Prospectus included in this Registration Statement on Form S-1.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
July 23, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
ELMS, FARIS & CO., P.C.
Midland, Texas
July 26, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being certain of the
Officers and all of the Directors of Costilla Energy, Inc., a Delaware
Corporation, do hereby constitute and appoint Michael J. Grella and Bobby W.
Page, or either of them, with full power of substitution, our true and lawful
attorneys and agents, to do any and all acts and things in our names in the
capacities indicated which Michael J. Grella and Bobby W. Page, or either of
them, may deem necessary or advisable to enable the Company to comply with
the Securities Act of 1933, as amended, any state securities laws and any
rules, regulations and requirements of the Securities and Exchange Commission
in connection with the Registration Statement seeking to register shares of
Common Stock, $.10 par value, of Costilla Energy, Inc., including
specifically, but not limited to, the power and authority to sign such
Registration Statement, any and all amendments (including post-effective
amendments) to such Registration Statement and any other forms or documents
related to such Registration Statement which are required under federal or
state securities laws for us, or any of us, in our names in the capacities
indicated; and we do hereby ratify and confirm all that Michael J. Grella and
Bobby W. Page, or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in any number of counterparts,
and each such counterpart shall be considered an original hereof.
IN WITNESS WHEREOF I have hereunto set my hand this 12th day of July,
1996.
/s/ Cadell S. Liedtke
----------------------------------------------
CADELL S. LIEDTKE, Chairman of the Board,
Chief Executive Officer and Director
/s/ Michael J. Grella
----------------------------------------------
MICHAEL J. GRELLA, President, Chief
Operating Officer and Director
/s/ Henry G. Musselman
----------------------------------------------
HENRY G. MUSSELMAN, Executive Vice
President and Director
/s/ Bobby W. Page
----------------------------------------------
BOBBY W. PAGE, Senior Vice President,
Treasurer and Chief Financial Officer
/s/ Jerry Langdon
----------------------------------------------
JERRY LANGDON, Director
/s/ W. D. Kennedy
----------------------------------------------
W. D. KENNEDY, Director
<PAGE>
EXHIBIT 24.2
CERTIFICATE OF RESOLUTION
I, CLIFFORD N. HAIR, JR., Secretary of Costilla Energy, Inc., a Delaware
corporation, do hereby certify that the Board of Directors of Costilla
Energy, Inc., acting by unanimous written consent, duly adopted the following
resolutions as of July 1, 1996:
RESOLVED, that the directors and officers of the Corporation
are hereby authorized and directed to execute and deliver a Power
of Attorney to Michael J. Grella and Bobby W. Page in the following
form:
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being
certain of the Officers and all of the Directors of Costilla Energy,
Inc., a Delaware Corporation, do hereby constitute and appoint
MICHAEL J. GRELLA and BOBBY W. PAGE, or either of them, with fully
power of substitution, our true and lawful attorneys and agents, to
do any and all acts and things in our names and in the capacities
indicated which MICHAEL J. GRELLA and BOBBY W. PAGE, or either of
them, may deem necessary or advisable to enable the Company to comply
with the Securities Act of 1933, as amended, any state securities
laws, and any rules, regulations, and requirements of the Securities
and Exchange Commission in connection with the Registration Statement
seeking to register shares of Common Stock, $.10 par value of Costilla
Energy, Inc., including specifically, but not limited to, the power and
authority to sign such Registration Statement, any and all amendments
(including post-effective amendments) to such Registration Statement,
and any other forms or documents related to such Registration Statement
which are required under federal or state securities laws for us, or any
of us, in our names in the capacities indicated; and we do hereby ratify
and confirm all that MICHAEL J. GRELLA and BOBBY W. PAGE, or either of
them, shall do or cause to be done by virtue hereof. This Power of
Attorney may be signed in any number of counterparts, and each such
counterpart shall be considered an original hereof.
RESOLVED, that the Officers of the Corporation are hereby authorized
and directed to take all such further action as they may deem advisable
in order to carry out the intent and purposes of the foregoing
resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand on behalf of this
Corporation on this 15th day of July, 1996.
/s/ Clifford N. Hair, Jr.
-----------------------------------
CLIFFORD N. HAIR, JR., Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF COSTILLA ENERGY, L.L.C. FOR YEARS ENDED DECEMBER 31, 1993, 1994
AND 1995 AND THE UNAUDITED PERIODS MARCH 31, 1995 AND 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 2,616 2,760
<SECURITIES> 0 0
<RECEIVABLES> 7,576 7,584
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,881 11,394
<PP&E> 83,479 88,569
<DEPRECIATION> (9,413) (11,281)
<TOTAL-ASSETS> 87,367 91,024
<CURRENT-LIABILITIES> 8,385 9,290
<BONDS> 71,494 74,494
11,320 11,678
0 0
<COMMON> 0 0
<OTHER-SE> (7,189) (7,535)
<TOTAL-LIABILITY-AND-EQUITY> 87,367 91,024
<SALES> 21,693 8,833
<TOTAL-REVENUES> 21,816 8,951
<CGS> 10,355 3,659
<TOTAL-COSTS> 12,005 3,887
<OTHER-EXPENSES> 6,097 1,986
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,454 1,704
<INCOME-PRETAX> (4,311) 12
<INCOME-TAX> 3 0
<INCOME-CONTINUING> (4,314) 12
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,314) 12
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
